⚖️ Risk/Reward Ratio Calculator

Evaluate any trade before entering it. Calculate risk amount, reward amount, risk/reward ratio, break-even win rate, and expected value — essential tools for disciplined traders.

Entry Price ($)

Stop Loss Price ($)

Target Price ($)

Your Win Rate (%, optional)

What is the Risk/Reward Ratio?

The risk/reward ratio (also called the risk-to-reward ratio or R:R ratio) is a trading and investment metric that compares the potential loss on a trade to the potential profit — expressing how much risk you are accepting relative to the gain you expect to earn. A ratio of 1:2 means you risk $1 to potentially earn $2; a ratio of 1:3 means you risk $1 to potentially earn $3. The ratio is calculated by dividing the distance from your entry price to your stop loss (the risk) by the distance from your entry price to your profit target (the reward). It is one of the most important concepts in trading risk management, allowing traders to evaluate whether a trade is worth taking before committing capital.

The risk/reward ratio does not determine whether a trade will be profitable — markets are uncertain and any individual trade can win or lose. Its power lies in what it reveals about long-run expectancy when combined with win rate. A trader with a 40% win rate needs a minimum risk/reward ratio of 1:1.5 to break even over many trades. A trader with a 1:3 ratio can be profitable over time even with a win rate below 30%. Understanding the relationship between win rate and risk/reward ratio allows traders to design systems where the mathematics works in their favour over a large number of trades, regardless of any individual outcome.

In practice, risk/reward ratio is used to set stop-loss and take-profit orders before entering a trade — defining in advance the conditions under which you will exit at a loss (stop loss) and the target at which you will exit at a profit (take profit). This pre-trade planning removes emotional decision-making during the trade: once your levels are set, the trade either hits the stop or the target. Consistently using minimum risk/reward thresholds (many traders require at least 1:2) as a filter helps avoid low-quality trades and enforces the discipline necessary for long-term trading profitability.

Risk/Reward Formulas

Risk = |Entry − Stop Loss| Reward = |Target − Entry|

R:R Ratio = Reward ÷ Risk Break-even Win Rate = Risk ÷ (Risk + Reward)

Expected Value = (Win Rate × Reward) − ((1 − Win Rate) × Risk)

How to Use This Calculator

1

Enter Entry Price

The price at which you plan to enter the trade (buy for long, sell for short).
2

Enter Stop Loss

Your maximum loss exit point. Below entry for longs; above entry for shorts.
3

Enter Target Price

Your profit target exit price. Above entry for longs; below entry for shorts.
4

Enter Win Rate (opt)

Your historical win rate % to calculate expected value per trade and edge.

Real-World Example

Entry: $100. Stop Loss: $95. Target: $115. Win rate: 50%.

Risk = $100 − $95 = $5

Reward = $115 − $100 = $15

R:R Ratio = $15 ÷ $5 = 1:3

Break-even Win Rate = 5 ÷ 20 = 25%

EV = (0.50 × $15) − (0.50 × $5) = +$5 per trade

How the Risk Reward Ratio Calculator Works

Formula, assumptions, and calculation steps for this finance tool.

Methodology

Financial calculators use time-value-of-money, rate conversion, amortization, or return formulas depending on the tool. Inputs are normalized to matching periods before the final result is calculated.

Calculation Steps

Enter the principal amounts, rates, terms, or cash flows requested by the calculator.
Convert annual rates to the correct monthly, daily, or yearly period when needed.
Apply the finance formula for payment, return, yield, or future value.
Show the result with supporting totals such as interest, gain, or balance.

Assumptions and Limits

Rates are assumed constant unless the calculator asks for a schedule.
Taxes, fees, and inflation are included only when fields are provided.
Financial results are estimates for planning, not investment or lending advice.

Frequently Asked Questions

What is a good risk/reward ratio?

Most professional traders require at least a 1:2 ratio (risk $1 to make $2). Many successful traders target 1:3 or better. A 1:1 ratio means you need a 50%+ win rate just to break even.

What is the break-even win rate?

The minimum win rate needed to be profitable at a given R:R ratio. Formula: Risk ÷ (Risk + Reward). At 1:2 R:R, you only need to win 33% of trades to break even. At 1:3, only 25%.

What is expected value (EV)?

EV = (Win Rate × Reward) - (Loss Rate × Risk). Positive EV means the trade is profitable in the long run. Even high-win-rate strategies can have negative EV if the rewards are too small.

Should I take every trade with a positive R:R?

Not necessarily. A trade must have BOTH a favorable R:R ratio AND a win rate above the break-even level to have positive expected value. Always consider your actual win rate.

How does position sizing relate to R:R?

Once you know your risk amount per share, you can size your position to risk only a fixed % of your portfolio (e.g., 1-2% per trade). Multiply your max $ risk by (account size × 1%) to find shares.

Real-World Applications

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Stock Trade Entry & Exit Planning

A trader identifies a stock at $50 with a stop loss at $47 (risk: $3) and a price target at $59 (reward: $9) — a 1:3 risk/reward ratio. Before entering, the trader confirms the ratio meets their minimum threshold (e.g., 1:2), sets both orders simultaneously, and defines the trade outcome in advance rather than making emotional decisions while the position is open.

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Cryptocurrency & Crypto Trading

Crypto traders face highly volatile markets where large moves happen quickly. Setting a clear stop loss and take profit with a minimum 1:2 risk/reward ratio before entering a position protects against the common trap of holding losing trades hoping for recovery while exiting winners too early — the classic asymmetric mistake that destroys trading accounts over time.

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Options Strategy Selection

Options traders evaluate risk/reward ratios across strategies — a long call option risks the premium paid but has theoretically unlimited upside, giving a favourable asymmetric risk/reward profile. A covered call caps upside in exchange for income. Comparing risk/reward across strategies helps traders select the structure that aligns with their market outlook and risk tolerance.

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Venture Capital Investment Screening

Venture capitalists implicitly use risk/reward analysis: they expect most portfolio companies to fail (high risk) and price investments to achieve 10–100× returns on winners to compensate. A fund that invests in 20 companies expecting 15 failures needs the 5 successes to return enough capital to profit overall — a portfolio-level risk/reward framework rather than a per-trade one.

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Forex Position Sizing & Risk Management

Forex traders use risk/reward ratio combined with position sizing to limit account risk. A trader risking 1% of their account per trade with a 1:2 risk/reward ratio can be profitable with a win rate above 34% — building a mathematically sound trading system that survives inevitable losing streaks without catastrophic account drawdown.

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Business Project Go/No-Go Decisions

Project managers evaluate capital allocation using risk/reward thinking — estimating the potential downside (project cost, opportunity cost, reputational risk if it fails) against the potential upside (revenue, strategic positioning, cost savings). Projects with low upside relative to cost and risk are rejected; high-upside, low-risk projects are prioritised.

Common Mistakes

Setting stop losses based on round numbers rather than technical levels

Placing a stop loss at a round number (e.g., $50.00) rather than below a genuine support level or structural low means the stop may be triggered by normal price oscillation before the actual trend reversal. Effective stop placement is based on where the trade thesis is invalidated — the level where the expected move cannot logically occur if the trade idea is correct.

Moving the stop loss further away after the trade goes against you

Widening the stop loss when a trade moves against you increases risk beyond the original plan and destroys the original risk/reward calculation. This emotional response to an adverse position — hoping the trade will recover — is one of the most common causes of large trading losses. The stop loss should be set at trade entry and honoured without adjustment.

Ignoring win rate when evaluating risk/reward ratio

A 1:3 risk/reward ratio looks excellent in isolation, but if the trading setup has a 20% win rate, the mathematical expectancy is negative: (0.20 × 3) − (0.80 × 1) = −0.20. Risk/reward ratio only tells half the story — it must be combined with the realistic win rate for that specific setup to determine whether a strategy has positive mathematical expectancy over many trades.

Using unrealistic profit targets that are rarely hit

Setting a 1:5 risk/reward ratio with a profit target at a level the price rarely reaches produces a nominally impressive ratio but a very low actual win rate — most trades hit the stop loss before reaching the distant target. A 1:2 ratio with a realistic, frequently achievable target often produces better actual results than a 1:5 ratio with a target that is hit only occasionally.

Not accounting for spreads and commissions in the ratio calculation

The bid-ask spread and trading commissions reduce both the effective reward (you sell at the bid, not the mid-price) and increase the effective risk. On tightly spread instruments this is minor; on wide-spread assets (illiquid stocks, some crypto pairs, emerging market FX) spreads can consume a significant fraction of the expected reward, reducing the actual R:R ratio well below the theoretical figure calculated from mid-prices.