OptionsAcademy

The risk-reward ratio (also called risk/reward) is the comparison between how much you risk losing and how much you can win.

How to Calculate

Risk-Reward Ratio = Max Profit / Max Loss

If a spread has:

• Max loss: $300
• Max profit: $700
• Risk-reward ratio: 700/300 = 2.33:1

For every $1 you risk, you can win $2.33.

Minimum Ratio

Professional traders won't take a trade unless the risk-reward ratio is at least 1:1 (or better).

• 1:1 ratio = Fair
• 2:1 ratio = Good
• 3:1 ratio = Excellent

If your max loss is $300 and max profit is $200, that's a 0.67:1 ratio. Skip it.

Why It Matters

Over many trades, you want wins to be bigger than losses. A 1:2 ratio (lose $1, win $2) is powerful.

Even if you're only right 40% of the time, a 1:2 ratio is profitable:

• 4 losses × $100 = -$400
• 6 wins × $200 = +$1,200
• Net: +$800

In Practice

Review every trade:

1. What's my max risk?
2. What's my max profit?
3. Is the ratio acceptable?

If not, skip the trade. There's always another one.

Related: Stop Loss, Profit Target, Max Loss, Max Profit