Risk Reward Calculator

Calculate exactly how much you stand to risk versus reward on any trade.

How to Use the Risk-Reward Calculator

Enter Entry Price: Input the price at which you plan to enter or open the trade (buy or sell short).
Enter Stop-Loss Price: Input the price at which you will exit the trade if it moves against you to limit your losses. This should be below entry for a long trade, above for a short.
Enter Target Price: Input the price at which you plan to exit the trade to take profits. This should be above entry for a long trade, below for a short.
Input Position Size: Enter the number of shares, units, contracts, or the total dollar amount you are trading. This determines the total dollar risk/reward.
Select Currency: Choose the currency your prices are denominated in for correct display of results.
Click Calculate: The results panel will instantly display your potential risk amount, reward amount, and the crucial risk-reward ratio.

Tip: Always use realistic stop-loss and target prices based on technical analysis (like support/resistance levels) or volatility, rather than arbitrary wishful thinking. Avoid overly ambitious reward estimates that are unlikely to be hit.

What Is the Risk-Reward Ratio?

The Risk-Reward Ratio measures the potential profit of a trade relative to its potential loss. It's a fundamental concept in risk management for traders and investors.

Essentially, it asks: "For every $1 I am risking, how many dollars do I stand to potentially gain?"

Risk-Reward Ratio = Potential Reward / Potential Risk

Calculating this ratio *before* entering a trade helps you decide if the potential upside justifies the potential downside. Consistently taking trades with a favorable risk-reward ratio (where potential reward outweighs potential risk) is key to long-term trading success, even if you don't win every trade. It helps maintain a positive expectancy.

What Is "Risk"?

In this context, risk is the potential loss on the trade if your stop-loss order is triggered. It's the difference between your entry price and your stop-loss price, multiplied by your position size.

Risk Visual: [Entry Price] [Stop-Loss Price]

What Is "Reward"?

Reward is the potential profit on the trade if your target price is reached. It's the difference between your target price and your entry price, multiplied by your position size.

Reward Visual: [Entry Price] ---Up To-- [Target Price]

How to Read Your Risk-Reward Ratio

The ratio is typically expressed as "1 : X", where X represents how many units of reward you expect for every 1 unit of risk.

Ratio of 1:1 means your potential reward is equal to your potential risk. (e.g., Risk $100 to make $100). You'd need to win more than 50% of the time to be profitable long-term (excluding fees).
Ratio of 1:2 means your potential reward is twice your potential risk. (e.g., Risk $100 to make $200). This is often considered a minimum acceptable ratio by many traders, as it allows profitability even with a win rate below 50%.
Ratio of 1:3+ means your potential reward is three times (or more) your potential risk. (e.g., Risk $100 to make $300). These setups offer high potential profit but may occur less frequently or have a lower probability of hitting the target.

General Guideline: While there's no single "perfect" ratio, consistently aiming for trades with a risk-reward ratio of at least 1:1.5 or 1:2 helps build a statistical edge over many trades.

If a trade setup shows an unfavorable ratio (e.g., 1:0.5 - risking $100 to make $50), consider adjusting your stop-loss (tighter) or target (further), *if market conditions support it*, or simply pass on the trade. Don't force a poor risk-reward setup.

Pro Tip: The Risk-Reward Ratio is most powerful when combined with your historical Win Rate (percentage of winning trades). Together, they help calculate your trading system's Expectancy (average profit/loss per trade). Positive expectancy is the goal.

Risk-Reward Calculator Examples

Example 1: Long Stock Trade

Stock: XYZ Corp
Entry Price: $50.00
Stop-Loss: $47.00 (below recent support)
Target Price: $56.00 (near previous resistance)
Position Size: 100 shares

Calculation:

Risk per Share: $50.00 - $47.00 = $3.00
Reward per Share: $56.00 - $50.00 = $6.00
Total Risk: $3.00 * 100 = $300
Total Reward: $6.00 * 100 = $600
Risk-Reward Ratio: $6.00 / $3.00 = 2.0 = 1 : 2.00

Example 2: Short ETF Trade

ETF: QRS Index
Entry Price (Short): $80.00
Stop-Loss: $83.00 (above recent resistance)
Target Price: $74.00 (near previous support)
Position Size: 50 shares

Calculation:

Risk per Share: $83.00 - $80.00 = $3.00
Reward per Share: $80.00 - $74.00 = $6.00
Total Risk: $3.00 * 50 = $150
Total Reward: $6.00 * 50 = $300
Risk-Reward Ratio: $6.00 / $3.00 = 2.0 = 1 : 2.00

(Note: Calculator assumes long trade inputs; short requires reversing perspective or separate logic).

The Importance of Risk Management in Trading

Understanding and applying the risk-reward ratio is a cornerstone of effective risk management. Here's why it's crucial:

Capital Protection: Consistently risking less than you stand to gain helps protect your trading capital, especially during inevitable losing streaks. A few large losses can wipe out many small wins if risk isn't managed.
Consistent Position Sizing: Knowing your risk per trade (in dollar terms) allows you to calculate the appropriate position size based on your overall account risk tolerance (e.g., risking only 1-2% of your capital per trade).
Maintaining Discipline: Pre-defining your risk (stop-loss) and reward (target) based on the ratio helps remove emotional decision-making during the trade. You have a plan before you enter.
Achieving Profitability: A favorable risk-reward ratio, combined with a reasonable win rate, creates a positive mathematical expectancy, which is the foundation of long-term profitable trading.

Ignoring risk-reward often leads traders to take trades with poor potential, hold onto losers too long, or cut winners too short – common pitfalls that hinder success.

Risk-Reward Calculator FAQs

Is a 1:3 ratio always better than 1:2?▼

Not necessarily. While a higher reward potential is attractive, a 1:3 target might be hit less frequently than a 1:2 target. Trading success depends on both the risk-reward ratio *and* the win rate. A strategy with a 1:2 ratio and a 40% win rate can be profitable, while a 1:3 ratio with only a 20% win rate might not be. Focus on realistic targets based on market structure and volatility.

Can I use this calculator for options trades?▼

Yes, conceptually. You can use the option's premium (cost) as the 'Entry Price'. Your 'Stop-Loss Price' could represent the premium level where you'd cut losses (e.g., a 50% loss, so stop = entry * 0.5), or potentially zero if you risk the whole premium. The 'Target Price' would be your desired exit premium. Remember that options have complexities like time decay (theta) not captured here.

What if my stop-loss is above my entry price?▼

The calculator currently assumes a standard 'long' trade where you buy low and sell high, meaning the stop-loss should be below the entry. If your stop-loss is above the entry, it might indicate a 'short' trade setup or an error in input. The tool will show an error message prompting you to check your inputs for a standard long trade.

How accurate is the calculation?▼

The calculation itself (Risk Amount, Reward Amount, Ratio) is precise based on the numbers you enter. However, the *real-world outcome* depends on whether the market actually hits your exact stop-loss or target price, accounting for potential slippage (getting filled at a slightly different price) and commissions/fees, which are not included in this basic calculation.