Trading knowledge libraryHow to Calculate Risk-to-Reward Before You EnterTrading Math
Trading Math
How to Calculate Risk-to-Reward Before You Enter
The ratio is worked before the trade, in a fixed order: the stop price, the target price, both distances measured, then divided. This paper shows you the four steps on one real plan, how the same two lines give three different ratios at three entries on one real day, and where the two prices sit on your platform's ticket.
The ratio is the last number you learn about a trade, and it comes from four steps done in order. First, the stop price: where the trade will be closed if it goes wrong. Second, the target price: where it will be closed if it goes right. Third, both distances measured from the entry in pips — a pip is the fourth decimal place of the price. Fourth, the target distance divided by the stop distance. On the open of 3 September 2026, 1.15872, with a stop at 1.15672 and a target at 1.16172, the distances are 20 and 30 pips and the ratio is one to one and a half.
The entry moves the answer
Once the stop and the target are fixed, the only number left is the entry, and it moves the ratio more than people expect. At the open, 1.15872, the plan is 30 pips up against 20 down: one to one and a half. In the 03:00 hour the price dipped to 1.15834; an entry at 1.15842 is 33 up against 17 down, nearly one to two, from the same two lines. An entry ten pips above the open, at 1.15972, is 20 up against 30 down: one to 0.7 — the reward now smaller than the risk. The lines did not move. The entry alone changed the answer, in both directions.
