A risk-reward ratio compares the amount you plan to lose if a trade is invalidated with the amount you hope to make if a target is reached. A plan with 100 dollars of possible loss and 200 dollars of possible reward has a 2:1 reward-to-risk ratio.
The number is useful because it forces a trade idea to include an exit on both sides. It is not a score that makes a trade good, and it does not tell you how likely either outcome is.
Calculate the ratio before the order
For a long practice trade, estimate the distance from entry to stop and from entry to target. For a short practice trade, use the same idea but reverse the favourable direction. The price distances must be compared on the same unit basis before fees and execution costs are considered.
You can check the arithmetic with the risk-reward calculator. Then write down the three prices separately: entry, invalidation, and target. If you need to move one of them to make the ratio look better, the ratio is no longer describing the original idea.
A ratio does not predict your win rate
A 3:1 plan can still lose. A 1:1 plan can still win. The ratio only describes the planned payoff relative to the planned loss. A useful review asks whether the target was realistic, whether the invalidation was chosen before the outcome, and whether the trade was sized so that a loss remained manageable.
Do not increase leverage simply to create a larger reward number. Leverage changes exposure and can make a relatively small price move create a large change in margin. The crypto profit calculator can help you see how margin and position value interact in a simulation.
Build a complete example
Suppose a simulated long has an entry at 100, a planned invalidation at 95, and a target at 110. The planned risk is 5 price units and the planned reward is 10 price units, so the reward-to-risk ratio is 2:1 before costs. That is the description of the plan, not a reason to place it.
Next, check whether the position size matches the account rule you are practising. A five-unit move on a small position may be manageable. The same move on a position that uses too much margin may not be. Record fees and spread assumptions as well. A ratio calculated without costs can overstate the result of a short-term trade.
Use scenarios instead of one perfect target
Crypto prices do not have to move directly from entry to target. Create a simple scenario table in your journal:
- Target reached: What did the plan require, and what costs would apply?
- Invalidation reached: Was the loss within the amount you intended to test?
- Sideways market: What would make you close, wait, or cancel the order?
The sideways case is easy to ignore, but it exposes whether your plan depends on constant movement. It also helps you review time and attention as part of the trade process.
Review the plan, not only the result
After the practice trade, compare the actual path with the original plan. Did you cancel the setup because the entry condition never appeared? Did you move the stop when the loss became uncomfortable? Did a fee or spread change the expected payoff? These details show whether the ratio improved your process.
For a broader introduction to sizing, see position sizing basics. Risk-reward planning works best when the ratio, size, and invalidation are written before the order, not reconstructed after the chart moves.