How it works
Target price = entry × (1 + target return). Stop price = entry × (1 − stop-loss %). Reward-to-risk = target return ÷ stop-loss %.
Reading reward-to-risk
A ratio of 2 means a winning trade earns twice what a losing trade loses, so you can be profitable even with a win rate below 50%.
Size the position from the loss you accept
If you will risk 2% of a 10,000,000 account (200,000) and your stop is 10% below entry, buy 2,000,000 worth. Position size = money at risk ÷ stop-loss percentage. This calculation comes before choosing a target.
Choosing the stop level
Three common approaches: work back from the money you can lose, place it wider than the stock recent average daily range, or put it where a break would mean your reason for buying was wrong. A stop tighter than the daily range gets hit by ordinary noise.
What to keep in mind
Actual orders must match the tick size, and in a sharp drop fills can come in below your stop. A sudden move can trigger a volatility interruption that switches the stock to a two-minute single-price auction, so an exit may not fill at your price. Fees and taxes are not included.