Risk/Reward Calculator
Analyze your stock trades: Calculate risk/reward ratio, potential profit & loss, and required win rate.
The Risk Reward Calculator is an essential tool for stock traders to evaluate the potential profitability of a trade against its potential loss. Calculating the risk to reward ratio before entering a position helps ensure that the potential gains justify the risks involved, forming a key part of a sound trading plan.
Use this trade analysis tool to objectively assess stock trade setups, manage risk effectively, and make more informed decisions aligned with your strategy. Understanding your risk/reward helps determine if a trade has a positive expectancy over time.
Understanding Risk/Reward Ratios in Stock Trading
The risk/reward ratio (often abbreviated as R/R) measures the potential profit of a trade relative to its potential loss. It's a cornerstone of risk management, helping traders decide if a potential reward justifies the capital risked.
How to Determine Inputs
- Entry Price: The price at which you intend to buy (for long trades) or sell short (for short trades) the stock.
- Stop Loss Price: The predetermined price at which you will exit the trade to limit your loss if the stock moves against you. This is often set based on technical analysis, such as below a support level (for longs) or above a resistance level (for shorts).
- Target Price: The price at which you plan to take profit if the trade moves in your favor. This might be based on resistance levels (for longs), support levels (for shorts), chart patterns, or a fixed R/R multiple (e.g., aiming for 2x your risk).
- Position Size (Shares): The number of shares you intend to trade. This is crucial for calculating the total dollar amounts for potential profit and loss. Use our Position Size Calculator to determine this based on your account size and risk percentage per trade.
Interpreting Your Risk/Reward Ratio
The ratio is typically expressed as Risk:Reward. For example:
- 1:1 Ratio: Potential loss equals potential profit.
- 1:2 Ratio: Potential profit is twice the potential loss (Generally considered favorable).
- 1:3 Ratio: Potential profit is three times the potential loss (Highly favorable).
- 2:1 Ratio: Potential loss is twice the potential profit (Generally unfavorable - requires a very high win rate).
Many traders aim for setups offering at least a 1:2 or 1:3 risk/reward ratio, as this means winning trades significantly outweigh losing trades, allowing profitability even if fewer than half of the trades are winners.
Example Stock Trade Calculation
Imagine you want to buy Stock ABC:
- Entry Price: $100
- Stop Loss: $95 (Risk per share = $5)
- Target Price: $115 (Reward per share = $15)
- Position Size: 50 shares
Calculations:
- Potential Loss = Risk per share * Position Size = $5 * 50 = $250
- Potential Profit = Reward per share * Position Size = $15 * 50 = $750
- Risk/Reward Ratio = Potential Reward / Potential Risk = $15 / $5 = 3. The ratio is 1:3.
- Win Rate Needed = 1 / (1 + Reward/Risk) = 1 / (1 + 3) = 1 / 4 = 25%. You need to win only 25% of trades with this profile to break even.
Risk/Reward, Position Sizing, and Psychology
These two concepts work hand-in-hand. First, use the risk reward calculator to assess if a trade setup's potential reward justifies the risk per share. If the R/R is acceptable (e.g., 1:2 or better), then use the Position Size Calculator to determine how many shares to trade so that the *total dollar loss* (if the stop is hit) stays within your overall risk management plan (e.g., 1% of account capital). Sticking to trades with good R/R ratios and proper position sizing fosters discipline and reduces emotional trading.
Risk Reward Calculator FAQs
What is a good risk/reward ratio for stock trading?
While subjective, many successful stock traders target a minimum risk/reward ratio of 1:2 or 1:3. This means for every $1 risked (potential loss if stop-loss is hit), they aim to make $2 or $3 (potential profit if target is reached). This allows for profitability even with a lower win rate (e.g., below 50%).
How do I use this stock risk reward calculator?
Simply enter your planned Entry Price, your Stop Loss price (where you'll exit if wrong), your Target Price (where you plan to take profit), and the number of shares you intend to trade (your Position Size). The risk reward ratio calculator will instantly show the R/R, total potential dollar profit and loss, and the breakeven win rate needed.
What's the difference between Risk/Reward Ratio and Win Rate?
They are related but distinct. Risk/Reward Ratio measures the *size* of potential wins versus potential losses on a single trade. Win Rate measures *how often* you win trades over a series. You need both for profitability. A high R/R (like 1:5) means you can be profitable with a low win rate, while a low R/R (like 1:1) requires a high win rate (over 50%). This calculator helps you see the required win rate for a given R/R.
Can I calculate risk reward without a specific target price?
To calculate a specific ratio, you need a target price. However, traders sometimes manage trades differently, like trailing a stop-loss. You can still use the calculator for planning by setting hypothetical targets based on analysis (e.g., next resistance level, Fibonacci extension) to see if the *potential* R/R meets your criteria before entering.
Is a higher risk/reward ratio always better?
Not necessarily in isolation. While a higher potential reward relative to risk (e.g., 1:10) looks attractive, trades with extremely high R/R often have a very low probability of reaching the target price (i.e., a low win rate). It's about finding a balance between R/R and a realistic win rate that fits your trading strategy and results in positive expectancy over time.
Why is calculating risk to reward important?
Calculating the risk to reward helps ensure you only take trades where the potential gain adequately compensates for the risk. It prevents taking trades with poor potential, enforces discipline, aids in comparing different trade opportunities, and is fundamental to long-term trading success and risk management.