What Is a Risk/Reward Ratio?

How is it calculated?

R/R = (target − entry) ÷ (entry − stop) for a long, reversed for a short.

Worked example. Entry $210.00, stop $205.00, target $225.00. Risk is $5.00, reward is $15.00, so the ratio is 3:1. That trade risking 1% of a $40,000 account is $400 at risk and $1,200 of planned reward, on an 80-share position.

What win rate does each ratio need?

Breakeven win rate is 1 ÷ (1 + R):

Risk/reward	Breakeven win rate	Win rate for +0.3R expectancy
1 : 1	50.0%	65.0%
2 : 1	33.3%	43.3%
3 : 1	25.0%	32.5%
5 : 1	16.7%	21.7%

The third column comes from solving W × R − (1 − W) = 0.3 for W. It shows the real trade-off: higher ratios need lower hit rates, and hit rates fall as targets get further away.

Why do high advertised ratios so often disappoint?

Because the target has to be reached. A 5:1 setup where price turns at 3:1 and comes back to the stop is a −1R trade, not a 5:1 one. The planned ratio is an intention; the realised ratio is a measurement, and only the second belongs in a track record.

The gap between them is the single most common inflation in a trading journal — recording planned R/R on winners and realised R on losers produces a record that is both honest-looking and wrong.

What else moves the real number?

Costs. $12 of round-trip cost against a $400 risk consumes 3% of the risk budget, shaving a 3.00 ratio to about 2.91.

Slippage on the stop. A stop filled $0.40 beyond its level on a $5.00 stop makes the realised risk $5.40 and the ratio 2.78 rather than 3.00.

Partial exits. Scaling out lowers the realised ratio relative to the plan by design. That is a legitimate choice, and it should be reflected in the recorded number.

How does this connect to a track record?

Why the planned ratio and the realised one come apart has a documented cause. Kahneman and Tversky showed that people are risk-averse over gains and risk-seeking over losses relative to a reference point^[1] — exactly the pair of behaviours that takes profit early and lets a loss run past its stop, shrinking realised R:R below whatever was planned.

The same gap has been measured directly, twice. Shefrin and Statman named the disposition effect in 1985,^[2] and Odean confirmed it across 10,000 brokerage accounts: investors realise gains far more readily than losses.^[3] Both halves shrink realised R:R — the target is cut short, the stop is not honoured.

Mean R:R on a kappi profile is computed from committed trades, so it is the realised ratio rather than the intended one. A metric is a summary of a record, so it inherits every weakness of that record. Computed from trades selected after the fact, it is a number about the selection. kappi commits each trade before it resolves and publishes it on a Merkle-anchored log, so PnL, RME, correlation to SPX, mean R:R and trade count over 30, 100 and 200-day windows are computed over everything that was committed, losses included. $15/month to keep a record; reading one is free.