Risk/Reward Ratio Calculator
This risk to reward ratio calculator is an essential tool for traders to evaluate potential trades and manage risk effectively.
The risk to reward ratio calculator (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.
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 to reward ratio calculator (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.
Related Trading Tools
Related Tools: Before analyzing risk/reward, determine your trade size with our Position Size Calculator, or assess your strategy's effectiveness with the Win Rate Calculator.
Risk/Reward Calculator FAQs
How do I calculate risk to reward ratio?
Risk to reward ratio = (Potential Reward) / (Potential Risk). Subtract your entry price from your target price for reward, and entry price from stop loss for risk. Divide reward by risk to get the ratio. This helps you assess if a trade is worth taking.
What is a good risk/reward ratio in trading?
Many traders aim for a minimum risk/reward ratio of 1:2 or 1:3. This means your potential profit should be at least two or three times greater than your potential loss for each trade.