Risk/Reward Calculator
Calculate your risk/reward ratio and potential profit/loss to make smarter trading decisions
The Risk/Reward Calculator helps traders evaluate the potential profit compared to the potential loss of any trade. This critical ratio is fundamental to developing a sustainable trading strategy and managing risk effectively.
By analyzing your potential reward against your risk before entering a trade, you can ensure that each position aligns with your overall trading strategy and has a favorable probability of success.
Understanding Risk/Reward Ratios in Trading
The risk/reward ratio is a fundamental concept in trading that compares what you're risking to what you expect to gain. It helps traders evaluate whether a trade is worth taking based on potential outcomes.
Interpreting Your Risk/Reward Ratio
- 1:1 ratio: You're risking the same amount you expect to gain
- 1:2 ratio: For every $1 risked, you expect to gain $2 (favorable)
- 2:1 ratio: For every $2 risked, you expect to gain $1 (unfavorable)
Most professional traders aim for risk/reward ratios of 1:2 or better, meaning they expect to gain at least twice what they're risking on each trade. This allows them to be profitable even with a win rate below 50%.
Win Rate and Profitability
The "Win Rate Needed" calculation shows the minimum percentage of trades you need to win to break even with your current risk/reward ratio:
- A 1:2 risk/reward ratio requires only a 33.3% win rate to break even
- A 1:1 risk/reward ratio requires a 50% win rate
- A 2:1 risk/reward ratio requires a 66.7% win rate
This calculator helps you evaluate whether your strategy's expected win rate aligns with the risk/reward profiles of your trades.
Frequently Asked Questions
What is a good risk/reward ratio?
Professional traders typically aim for a risk/reward ratio of at least 1:2 or better, meaning they expect to make at least twice as much on winning trades as they lose on losing trades. This allows for profitability even with a win rate below 50%.
How do I use the risk/reward calculator?
Enter your trade's entry price, stop loss level, target price, and position size. The calculator will then show your risk/reward ratio, potential profit, potential loss, and the minimum win rate needed to break even with this trade setup.
Why is the win rate needed important?
The win rate needed tells you what percentage of trades with this risk/reward profile must be winners for you to break even. If your trading strategy historically wins less often than this percentage, you'll likely lose money over time with this risk/reward setup.
Should I always follow the 1:2 risk/reward rule?
While a 1:2 risk/reward ratio is a good starting point, the appropriate ratio depends on your trading strategy. Some strategies (like high-probability mean reversion trades) might work well with 1:1 ratios if they have high win rates, while trend-following strategies might aim for 1:3 or better to compensate for lower win rates.