Risk-Reward Ratio Calculator
Evaluate if a trade's potential reward justifies the risk.
For educational purposes only. This calculator does not provide financial advice. Actual trading outcomes may vary.
📊 Visual Analysis
What This Calculator Does
The Risk-Reward Ratio Calculator computes the ratio of potential profit to potential loss for a trade. Enter your entry price, stop loss price, and target price to see how much reward you stand to gain for each dollar of risk. This helps you evaluate whether a trade's potential payoff justifies the risk before entering the position.
Formula
Where:
- Entry Price = The price at which you plan to enter the trade
- Stop Loss = The price at which you will exit to limit losses
- Target Price = The price at which you plan to take profits
The result is expressed as a ratio. For example, an R:R of 1:2 means you stand to gain $2 for every $1 you risk. The formula works for both long positions (buying) and short positions (selling), as long as the prices are entered correctly.
Input Fields Explained
Entry Price ($)
The price at which you plan to enter the trade. For a long position, this is the buy price. For a short position, this is the sell price. Use the actual or intended execution price.
Stop Loss Price ($)
The price at which you will exit the trade to limit your loss. For a long position, this should be below the entry price. The difference between entry and stop loss defines your risk per share.
Target Price ($)
The price at which you plan to take profits. For a long position, this should be above the entry price. The difference between the target and entry defines your potential reward per share.
Example Calculation
You plan to buy a stock at $100, set a stop loss at $95, and a target at $115.
Risk = $100 − $95 = $5 per share
Reward = $115 − $100 = $15 per share
R:R = 15 ÷ 5 = 1:3
Interpretation: For every $1 of risk, you stand to gain $3. Whether this is favorable depends on the probability of reaching the target versus hitting the stop loss. A 1:3 ratio means you need roughly a 25% win rate to break even over many trades.
How to Read the Result
Expressed as 1:X, where X is the number of dollars of potential reward per dollar of potential risk. A ratio of 1:2 means $2 reward for $1 risk. No single ratio is universally best — the appropriate ratio depends on your strategy and win rate.
The dollar amount you could lose per share if the stop loss is triggered (entry price minus stop loss).
The dollar amount you could gain per share if the target is reached (target price minus entry price).
Common Mistakes
- Ignoring win rate. A favorable risk-reward ratio is meaningless if your win rate is too low. The two must be considered together to determine average profitability. A 1:5 ratio with a 10% win rate results in net losses over time.
- Forgetting slippage and commissions. The actual risk may be higher and the actual reward lower after accounting for slippage (the difference between intended and actual execution prices) and broker commissions. These costs erode the effective R:R ratio.
- Making decisions based on R:R alone. R:R is one input to trade planning, not the full picture. Also consider the probability of the trade working, the overall market environment, and how the trade fits within your portfolio.
- Setting arbitrary targets. Target prices should be based on analysis (support/resistance levels, technical patterns, or fundamental factors), not chosen just to achieve a desired R:R ratio. An unrealistic target inflates the R:R without increasing actual profitability.
- Not adjusting stop losses. A stop loss set too tight may be triggered by normal volatility, while one set too loose increases the risk per trade. The stop loss should reflect the market structure and your risk tolerance.
When This Calculator Is Useful
- Evaluating whether a trade setup has sufficient profit potential relative to risk
- Setting stop loss and take profit levels before entering a trade
- Comparing multiple trade setups to identify the most favorable opportunities
- Journaling and reviewing past trades to assess your R:R discipline
Limitations
- Does not consider the probability (win rate) of the trade succeeding
- Does not account for slippage, gaps, or execution delays
- Does not include trading commissions or fees
- Does not apply to all strategy types (e.g., options spreads, grid trading)
- Assumes the stop loss and target will execute at exact prices, which may not happen
- This calculator is for educational purposes only and does not constitute financial advice
Frequently Asked Questions
What is a good risk-reward ratio?
There is no universally good risk-reward ratio — what is appropriate depends on your trading strategy, time horizon, and win rate. Some traders prefer high R:R ratios with lower win rates, while others prefer lower R:R ratios with higher win rates. The key is that your strategy's average profit per trade (win rate times reward minus loss rate times risk) is positive over many trades.
How does win rate relate to risk-reward?
The break-even win rate depends on your risk-reward ratio. With a 1:2 R:R, you need roughly a 34% win rate to break even. With a 1:3 R:R, you need about 25%. A higher R:R ratio gives you more room for losing trades, but trades with very high R:R ratios tend to have lower win rates. The relationship between win rate and R:R determines your long-term profitability.
Should I always aim for high R:R trades?
Not necessarily. Very high R:R trades (such as 1:10 or higher) often have very low win rates and may take a long time to reach the target. The best approach depends on your trading style, risk tolerance, and the market conditions you trade in. Some successful strategies use moderate R:R ratios with high win rates, while others use high R:R ratios with lower win rates.
Does a favorable risk-reward ratio guarantee profit?
No. The risk-reward ratio is a planning tool that shows the potential payoff relative to the risk. It does not guarantee that the target price will be reached or that the stop loss will hold. Slippage, gaps, and market volatility can cause actual outcomes to differ from the planned ratio.
How does position sizing relate to risk-reward?
Position sizing determines how much capital you risk on each trade, while the risk-reward ratio describes the relationship between potential profit and loss. Together they form a complete trade plan: the R:R ratio tells you the reward per unit of risk, and position sizing tells you how many units of risk to take. Even with a favorable R:R ratio, risking too much on a single trade can lead to significant drawdowns.
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Educational Disclaimer
This calculator is for educational and informational purposes only. It does not provide investment, financial, tax, or legal advice. The results are based on the inputs and assumptions you provide and may not reflect real market conditions, fees, taxes, or risks. Always do your own research or consult a qualified professional before making financial decisions.