The risk/reward ratio is determined by comparing a trade's potential profit and potential loss. The lower the risk/reward ratio is, the better.
A simple way to calculate the risk/reward ratio would be to first find the difference between the entry point of a trade and the stop-loss order. This is called the "risk" part of the ratio. To find the "reward" we find the difference between the target profit and entry point.
Divide the "risk" by the "reward" and we get the risk/reward ratio (R/R ratio).
Risk/Reward Ratio = (Entry point - stop loss point)/(Profit Target - Entry Point)
For example, if you buy at an entry point of $25.60, then place a stop loss at $25.50 and a profit target at $25.85, the risk/reward ratio is: