Risk Reward Ratio: Calculate It Before and After Fees

Risk reward ratio compares a trade's planned loss distance with its potential gain distance. If the plan risks $100 to pursue $200 before costs, risk:reward is 1:2. Some tools display the inverse, reward divided by risk, as 2.0, so check the convention before comparing numbers.

A larger displayed ratio does not prove a better trade. The probability of reaching the target, execution differences and costs still matter. We use hypothetical examples to separate those questions from the arithmetic.

Risk reward ratio starts with three prices

Write the proposed entry, invalidation level and target. For a long trade, the planned adverse distance is entry minus the exit level below it; the favorable distance is the target above it minus entry.

For a short trade, reverse the directions and use positive distance magnitudes. Do not let a negative spreadsheet sign hide the intended comparison.

Suppose a hypothetical long entry is 100, the planned stop level is 98 and the target is 104. The distances are two and four, giving risk:reward of 1:2 before costs. Multiplying both by the same contract value and quantity preserves that price-distance ratio.

CME's trade-plan risk lesson includes risk/reward as one part of a wider risk framework. The ratio is not a substitute for a loss budget or a combined-exposure limit.

Convert price distances into dollars

For futures, multiply the point distance by the contract's dollar value per point and the number of contracts. If your platform reports ticks, use tick value instead.

A five-point distance in one hypothetical $20-per-point contract is $100. A ten-point target distance in the same contract is $200. Increasing to two contracts doubles both to $200 and $400; the ratio remains 1:2 while the account exposure doubles.

That distinction is easy to miss. A ratio can look unchanged while the trade becomes much larger in dollar terms.

CME's position and risk-management lesson treats contract quantity as a separate control. Keep quantity and dollar risk visible beside the ratio rather than letting a favorable-looking ratio stand in for sizing.

Fees change the break-even math

Assume the gross winning outcome in a simplified example is $200 and the gross losing outcome is $100. Now assume $10 of total costs per completed trade, the same in both cases.

The net win becomes $190. The net loss becomes $110. The net reward-to-risk comparison is therefore 190 divided by 110, about 1.73, rather than 2.0.

These assumptions are deliberately simple. Actual fees and slippage can vary by quantity, order type and market conditions. Use your own records when evaluating a real method, and avoid counting a cost twice if it is already included in the reported net result.

Calculate a break even win rate carefully

If every winner has the same net gain W and every loser the same net loss L, the theoretical break-even win rate is L divided by W plus L.

Before costs in the example, that is 100 divided by 300, or about 33.33%. After costs, it is 110 divided by 300, or about 36.67%.

The formula describes a simplified two-outcome model. Real trades can include partial exits, scratch trades, varied losses and changing costs, so the sample averages and distribution matter.

Do not interpret the threshold as a forecast of your win rate. A target drawn at twice the stop distance does not establish that you will reach it often enough. The missing probability has to be investigated with appropriately collected evidence, not inferred from the charting tool's ratio label.

Planned reward and realized reward are different records

A trade planned at 1:3 may close at a small gain, a larger-than-planned loss or no gain at all. Record the intended structure before entry, then record the realized result separately.

If you move the stop farther away after entry, the original ratio no longer describes the current position. If you take part of the position off early, the final realized reward can differ from the full-target calculation.

That is not a reason to avoid recording the plan. It is a reason to preserve both versions and the explanation for each change.

Our article on why traders fail evaluations discusses process errors that an attractive target cannot resolve. A profitable result also does not prove the trade followed the account's rules.

Use expectancy without pretending the sample is certain

In a simplified model, expected value per trade is the probability of winning multiplied by the average net win, minus the probability of losing multiplied by the average net loss.

For an illustrative 40% win rate with $190 net wins and $110 net losses, the calculation is 0.40 × 190 minus 0.60 × 110, or $10 per trade. This is a hypothetical input-output calculation, not a performance claim.

If the true win rate is lower, the result changes. If losses are larger or costs rise, the result changes again. A small historical sample gives uncertain inputs, and favorable past results do not promise future results.

Include the account's daily loss limit and any trailing drawdown as separate constraints. A positive average in a simplified model does not mean every path of wins and losses fits those rules.

A ratio checklist before an order

Use the ratio to check a plan, not to manufacture one:

1. Identify the reason for the entry, invalidation and target.
2. Verify the units and contract multiplier.
3. Calculate dollar risk at the intended quantity.
4. Include realistic, labelled cost assumptions.
5. Check account limits and combined exposure.
6. Preserve the original plan for comparison with actual fills.

If the target was moved farther away only to improve the displayed ratio, revisit the chart reasoning. Arithmetic cannot supply evidence that the distant level is likely to be reached.

For another explanation of that chart context, compare MyTradingBuddy Ai plans. Review the response against your written conditions while keeping the final sizing, order and risk decisions under your own control.