Risk Reward Calculator

Risk reward calculator is an useful investment calculator for investors and traders to calculate the risk and reward ratio of a trade setup. Traders should not trade a stock when the risk to reward ratio is less than 1:2. The risk reward ratio calculator uses the entry price, stop loss, and profit target to calculate the risk-reward ratio for any investment.

Risk Reward Ratio Calculator
Buy Price
Stop Loss Price
Profit Target Price

Risk Reward
Risk Ratio
Stop Percent
Profit Percent

What is the risk-reward ratio?

The risk-reward ratio is a measurement that stock market investors and traders use to judge the potential profit for every dollar or risk involved in a stock or a trade.

Ideally, you want to minimize your risk while maximizing the rewards for investment.

How does the risk-reward ratio work?

There are risks for any type of investment, stocks, forex, or business. Through analysis, you can choose to invest only in stocks that have higher profit potential than the risks.

A 1:3 risk-reward ratio means for every dollar you risk, you can expect to make $3 dollars. If you are risking $1,000, you should expect a reward of $3,000 or more.

If you buy a stock when the price is $10, and you think the stock could rise to $13 in the next couple of months. From $10 to $13, there is a 30% upside potential, your risk should be lower than 10% to maintain a 1:3 risk-reward ratio.

A 10% loss of $10 is $9 which means you should have a stop loss at or above $9 to minimize your risk.

How to calculate the risk-reward ratio?

The risk-reward ratio formula is given below.

Risk-Reward Ratio = R/W, where

R = Risk

W = Reward

To calculate the risk-reward, we need to know the entry price, profit target, and stop loss.

Risk = (B-S)/B * 100, where

B = Entry price

S = Stop loss

Reward = (P-B)/B * 100, where

P = Profit

B = Entry price

Risk-Reward Example

Let's take a look at a trading example of how to calculate the risk-reward ratio.

If you buy a stock at the price of $20, and your profit target for the stock is $25 with a stop loss of $18. Let's calculate the risk-reward ratio for this trade.

Risk = ($20 - $18)/$20 * 100 = 10

Reward = ($25-$20)/$20 * 100 = 25

Risk-Reward Ratio = 10/25 = 1/2.5

That means this trade will have a risk-reward ratio of 1-2.5. If your rule is to have a 1:3 ratio for every trade, you should skip this trade.

How to use the risk-reward ratio in trading?

In the stock trading world, you need to increase the odds of success by analyzing stocks based on technical analysis or chart patterns.

These technical tools may improve your odds of picking a winning stock, but they are not 100% reliable as science does. Therefore, traders must develop their own rules and mental disciplines to find traders with a high probability of success.

Keep in mind, no matter which stocks you buy, or what perfect a pattern looks like, there is a good chance that the trade may fail.

To protect yourself from these failed traders from ruining your portfolio, you should only trade stocks that give you at least a 1:3 risk-reward ratio. With a 1:3 risk-reward ratio, you are allowed to fail three times and only execute one successful trade to break even.

Some traders use a 1:5 ratio which is a stricter rule. There will be fewer trades that will meet your risk-reward ratio, so you may have to wait a long time for these trades to show up.

What I do is use a 1:3 risk-reward ratio for most of my trades, but if I find stocks with a 1:5 risk-reward ratio, I would increase the size of my position. In other words, I bet bigger on the trades that have higher potential relative to the risks.

Many trading beginners jump into the stock market without any knowledge or skills. Their primary strategy is based on tips from their friends and families or the news headlines. These traders will be crushed before they even learn about applying the risk-reward ratio.

Risk-reward vs. Probability

Don't get confused by the risk-reward ratio with probability. If our risk-reward ratio is 1:3, but if the probability of a winning trade for a certain trade setup is only 10%, we will still end up losing money.

The point of trading is to develop a system that gives you an edge in the stock market. The edge could be chart patterns, fundamental factors, news, or a combination of all these strategies.

With your edge, you increase your stock pick winning rates.