Risk and Reward Calculator
Use this calculator to determine the potential profit and loss of a trade or investment, and to calculate its risk/reward ratio. This helps you assess whether the potential gain justifies the potential risk.
Understanding Risk and Reward in Trading
The concept of risk and reward is fundamental to successful trading and investing. It involves evaluating the potential profit (reward) of an investment against the potential loss (risk) you might incur. A well-defined risk/reward strategy helps traders make informed decisions, manage their capital effectively, and maintain discipline.
What is the Risk/Reward Ratio?
The Risk/Reward Ratio is a metric used to compare the expected returns of an investment to the amount of risk undertaken to earn those returns. It's typically expressed as the potential loss divided by the potential gain. For example, a ratio of 0.5 (or 1:2) means that for every $1 you risk, you stand to gain $2. A ratio of 2.0 (or 2:1) means you risk $2 to gain $1.
Generally, traders look for a low risk/reward ratio (e.g., 0.5 or less), indicating that the potential reward significantly outweighs the potential risk. However, the "ideal" ratio can vary based on your trading strategy, win rate, and risk tolerance.
Key Inputs Explained:
- Entry Price: This is the price at which you plan to buy an asset or open a position.
- Target Price (Take Profit): This is the price at which you intend to sell the asset to realize your desired profit. It represents your potential reward.
- Stop Loss Price: This is the price at which you will sell the asset to limit your losses if the trade moves against you. It represents your potential risk.
- Number of Units/Shares: This is the quantity of the asset you plan to trade. It helps calculate the total potential profit and loss for your entire position.
How to Interpret the Results:
- Potential Gain per Unit: The profit you expect to make for each unit of the asset if the trade reaches your target price.
- Potential Loss per Unit: The loss you expect to incur for each unit of the asset if the trade hits your stop loss price.
- Risk/Reward Ratio: This is the core metric. A ratio below 1.0 is generally considered favorable, meaning your potential reward is greater than your potential risk. The lower the ratio, the better.
- Total Potential Gain: The total profit you could make on your entire position if the trade is successful.
- Total Potential Loss: The total loss you could incur on your entire position if the trade goes against you and hits your stop loss.
Example Scenario:
Let's say you are considering buying shares of Company X:
- Entry Price: $100.00
- Target Price: $120.00
- Stop Loss Price: $95.00
- Number of Units: 100 shares
Using the calculator:
- Potential Gain per Unit: $120.00 – $100.00 = $20.00
- Potential Loss per Unit: $100.00 – $95.00 = $5.00
- Risk/Reward Ratio: $5.00 / $20.00 = 0.25 (or 1:4)
- Total Potential Gain: $20.00 * 100 = $2,000.00
- Total Potential Loss: $5.00 * 100 = $500.00
In this example, for every $1 you risk, you stand to gain $4, which is a very favorable risk/reward profile.