Risk/Reward Ratio

Average loss divided by average gain -- how much you risk per unit of expected reward on each trade.

What is the Risk/Reward Ratio?

The risk/reward ratio tells you how much a strategy risked on a typical losing trade compared to how much it gained on a typical winning trade. It answers the question: for every 1% of gain on an average win, how much did an average loss cost?

A ratio of 0.5 means the average loss was half the size of the average win -- you risked 0.5% for every 1% of potential gain. A ratio of 2.0 means the average loss was double the average win -- you risked 2% for every 1% of gain. Lower values are better. Note this is the inverse of the reward-to-risk convention some charting tools show (where a "2R" winner means the reward was twice the risk, and higher is better) -- here we express loss relative to win, so lower is better.

A lower risk/reward ratio means smaller losses relative to wins. The ratio alone does not determine profitability -- win rate matters too.

How It's Calculated

Risk/Reward Ratio

risk/reward = abs(average loss) / average gain

In plain English: take the average return across all losing trades, make it positive (since losses are negative numbers), and divide it by the average return across all winning trades. The result tells you the size of a typical loss relative to a typical win.

How Simula calculates this

Simula computes the risk/reward ratio from the actual trade returns in your backtest. Average gain is the mean return of all winning trades (as a percentage). Average loss is the mean return of all losing trades (also as a percentage, and negative). The ratio uses the absolute value of the average loss so the result is a positive number. If there are no winning trades or no losing trades, the ratio cannot be calculated and Simula displays N/A.

Is this a realized or target ratio?

Simula's risk/reward ratio is realized -- it is calculated from what actually happened in the backtest, not from what the strategy intended. A strategy might target a 1:2 risk/reward (risking 1% to gain 2%), but the actual trades may produce a different ratio depending on market conditions and how exits played out.

Worked Examples

Average loss smaller than average win

A strategy executes 10 trades. The 3 winners averaged +8.0% and the 7 losers averaged -2.0%.

risk/reward = abs(-2.0) / 8.0 = 2.0 / 8.0 = 0.25

The average loss was only 25% the size of the average win. For every 1% gained on a winning trade, the strategy risked only 0.25% on a losing trade. This is a favorable risk/reward ratio.

Average loss larger than average win

A strategy executes 10 trades. The 8 winners averaged +1.5% and the 2 losers averaged -8.0%.

risk/reward = abs(-8.0) / 1.5 = 8.0 / 1.5 = 5.33

The average loss was more than 5 times the average win. For every 1% gained on a winning trade, the strategy risked 5.33% on a losing trade. Even though this strategy won 80% of its trades, the large losses relative to the small wins explain why it had negative expectancy.

Equal average win and loss

A strategy has an average win of +3.0% and an average loss of -3.0%.

risk/reward = abs(-3.0) / 3.0 = 3.0 / 3.0 = 1.0

A ratio of 1.0 means the average win and average loss are the same size. Whether this strategy makes money depends entirely on its win rate -- it needs to win more than 50% of its trades to be profitable.

Reading Your Results

The risk/reward ratio is a positive number. Lower values mean the strategy risked less per unit of reward.

Below 0.5

The average loss is less than half the average win. The strategy keeps its losses small relative to its gains.

0.5 to 1.0

The average loss is smaller than the average win, but not by a wide margin. Whether the strategy is profitable depends on the win rate.

Exactly 1.0

The average win and average loss are the same size. Profitability depends entirely on winning more often than losing.

Above 1.0

The average loss is larger than the average win. The strategy needs a high win rate to compensate for the unfavorable ratio. The higher the ratio, the higher the win rate needs to be.

N/A

There were no winning trades or no losing trades. The ratio cannot be calculated because one side of the division is missing.

Things to Watch Out For

Risk/reward ratio without win rate is incomplete

A ratio of 0.25 sounds great, but if the strategy only wins 10% of its trades, it still loses money. A ratio of 3.0 sounds terrible, but if the strategy wins 90% of its trades, it can still be profitable. Always look at the risk/reward ratio together with win rate and expectancy.

The ratio uses averages, not extremes

The risk/reward ratio compares the average win to the average loss. A single outlier trade -- one very large win or one very large loss -- can shift the average significantly, especially with few trades. With a small number of trades, the ratio may not represent typical behavior. See Statistical Significance & Trade Count and Timeframes & Data for more on why sample size matters.

Leverage does not change the risk/reward ratio

If your strategy uses leverage, both the average win and average loss are amplified by the same factor. A +4% win and -2% loss become +8% and -4% at 2x leverage, but the ratio stays the same: 0.5 in both cases. However, if leverage causes a portfolio wipeout that removes subsequent trades, the averages may shift. Simula calculates the ratio for each leverage level separately.

Win Rate & Expectancy -- win rate measures how often you win; expectancy combines win rate with the average win and loss sizes into a single per-trade expected value. The risk/reward ratio provides the underlying win-size-to-loss-size comparison that feeds into expectancy.

Profit Factor -- compares total gains to total losses. The risk/reward ratio compares the averages, so it shows the per-trade relationship without accounting for how many wins and losses there were.