A neat 1:3 risk–reward ratio can still describe a bad trade. It tells you how far a planned target sits from entry relative to a planned stop; it does not tell you how likely either exit is, or what your fills will be. That distinction is the useful part of the ratio, not the ratio itself. (IG explains the comparison; Schwab places it inside a full trade plan)
Define the two distances first
For a long position, planned risk per unit is entry minus stop; planned reward per unit is target minus entry. Divide reward by risk and you have a reward-to-risk multiple. Some traders write the same comparison in the opposite order as risk:reward, so state the convention: 1:3 risk:reward means one unit at risk for three units targeted. The ratio is geometry around chosen prices, not a forecast. (IG's risk-management guide defines the comparison; Schwab describes the dollars expected for each dollar risked)
A small hypothetical
Suppose a rule risks 1R to target 2R. If it wins 40% of the time and every loss is exactly 1R, its gross average per trade is (0.40 × 2R) − (0.60 × 1R) = +0.20R, before costs. This is arithmetic for an invented example, not a measured strategy result. Change the win frequency, actual average win or average loss, and the result changes. IG's examples likewise connect a planned ratio to the win frequency needed for a positive result; Schwab recommends evaluating completed trades against the original plan. (IG's ratio example; Schwab on reviewing performance after a trade)
The stop is not a guaranteed loss ceiling
A chart can show a stop price with tidy precision, but execution is not that tidy. A standard stop can become a market order after its trigger; in a fast or gapping market the fill may be worse. Spread, commissions, market impact and delay also belong in the cost picture. CFA Institute distinguishes explicit charges from implicit trading costs, while Schwab explains why a stop-market execution may differ from its trigger price. (CFA Institute on trading costs; Schwab on stop-order execution)
That is why a planned 1:2 is not automatically a realised 1:2. A partial fill, a missed limit exit, slippage or an early discretionary close changes the ledger. Measure the actual average winner, actual average loser and all-in costs under the same rules; do not substitute the drawing on the chart for those observations. (Schwab's trade-plan review questions; CFA Institute's execution-cost framework)
What the ratio leaves out
The ratio does not choose a sensible stop, establish that a target is reachable, or prove an edge. Those prices and the entry rule are design decisions. If you move a stop farther away only to make a chart look attractive, the risk distance changes; if the target is selected after seeing the outcome, the apparent reward is contaminated by hindsight. A written plan makes those choices inspectable, not correct by default. (IG recommends setting exit points in the plan; Schwab's plan separates entry, sizing and exit decisions)
A further trap is changing the denominator without noticing. One trader may quote reward divided by risk; another may give risk first, then reward. Both can describe the same trade. Label the order and define whether “risk” means the distance to a stop, cash at risk after position sizing, or realised loss after costs. The number is only interpretable when its units and convention are visible. (IG presents risk first in its example; CFA Institute details explicit and implicit execution costs)
How you'd actually test it
Turn the chart idea into a frozen rule before running a backtest: specify entry, stop, target, whether exits can be partial, how ties and gaps are handled, and the instrument's trading costs. Keep the planned ratio fixed for the first comparison. Then record, per trade, the planned risk in account currency, actual net result in R, exit reason, and costs. Compare the planned multiple with the realised win rate and the distribution of net wins and losses; repeat on data not used to choose the rules. If you try several ratios or stops, log every version rather than reporting only the best one. This is a test design, not a promise that one ratio works. (Schwab's plan and review checklist; CFA Institute on measuring implementation and trading costs)
For a broader protocol on writing the rule before reading the curve, see Backtest Acceptance Criteria for Prop Traders. There, too, the decision rule should be fixed before the result is inspected. The realbacktesting methodology page shows what to check when reviewing the studio's own published cBot results.
Frequently asked
Does a higher risk–reward ratio mean a better trade?
No. It says the target is farther away relative to the planned stop. It says nothing by itself about the odds of reaching that target, the final fill or net expectancy. (IG on the ratio; CFA Institute on trading costs)
Is a stop price the maximum I can lose?
Not necessarily. A stop-market order can execute beyond its trigger; order type and market conditions affect the fill. (Schwab on stop orders; CFA Institute on implicit execution costs)
Takeaway
Use the ratio to describe a plan. Judge the method with the outcomes it actually delivers after costs, under rules written before the chart can persuade you.