Calculate Risk Reward

Risk-Reward Ratio Calculator

Use this calculator to determine the potential profit and loss of a trade, and to calculate its risk-reward ratio. This is a crucial tool for managing risk and evaluating trade setups in financial markets.

Understanding the Risk-Reward Ratio

The Risk-Reward Ratio is a fundamental concept in trading and investing, used to compare the potential profit of a trade to its potential loss. It helps traders assess the attractiveness of a trade setup and manage their capital effectively. A higher ratio generally indicates a more favorable trade, as it suggests you stand to gain more than you risk.

Key Components:

• Entry Price: The price at which you plan to open your trade (buy for a long position, sell for a short position).
• Stop Loss Price: A predetermined price level at which you will close your trade to limit potential losses. This is your maximum acceptable risk for the trade.
• Take Profit Price: A predetermined price level at which you will close your trade to realize potential gains. This is your target profit for the trade.
• Position Size: The number of units or shares of the asset you intend to trade. This directly impacts your total potential gain and loss.

How it's Calculated:

The calculator first determines the potential loss and gain per unit based on your entry, stop loss, and take profit prices. Then, it multiplies these by your position size to get the total potential loss and gain. Finally, the Risk-Reward Ratio is calculated by dividing the potential gain per unit by the potential loss per unit.

For example, if your potential gain per unit is $10 and your potential loss per unit is $5, your Risk-Reward Ratio is 2 (or 1:2). This means for every $1 you risk, you stand to gain $2.

Why is it Important?

1. Risk Management: It forces you to define your maximum loss before entering a trade, promoting disciplined trading.
2. Trade Selection: It helps you filter out trades with poor risk-reward profiles, focusing on opportunities where the potential reward significantly outweighs the risk.
3. Profitability: Even with a win rate below 50%, a consistently good risk-reward ratio (e.g., 1:2 or 1:3) can lead to overall profitability. For instance, if you win 40% of your trades with a 1:2 ratio, you could still be profitable.

Interpreting the Ratio:

• 1:1 Ratio: You risk $1 to potentially gain $1. You would need a win rate greater than 50% to be profitable.
• 1:2 Ratio: You risk $1 to potentially gain $2. A common target for many traders, as it allows for profitability even with a lower win rate.
• 1:3 Ratio or Higher: Considered excellent, as it offers substantial reward for a given risk.

While a high risk-reward ratio is desirable, it's important to balance it with the probability of the trade succeeding. Sometimes, a trade with a slightly lower ratio but a very high probability of success might be preferable to a trade with an excellent ratio but very low probability.

Example Usage:

Let's say you are considering buying shares of Company X:

• Entry Price: $50.00
• Stop Loss Price: $48.00 (You're willing to lose $2 per share)
• Take Profit Price: $56.00 (You expect to gain $6 per share)
• Position Size: 200 shares

Using the calculator:

• Potential Loss per Unit: $50.00 – $48.00 = $2.00
• Potential Gain per Unit: $56.00 – $50.00 = $6.00
• Total Potential Loss: $2.00 * 200 = $400.00
• Total Potential Gain: $6.00 * 200 = $1,200.00
• Risk-Reward Ratio: $6.00 / $2.00 = 3 (or 1:3)

This indicates a favorable trade setup where you stand to gain three times what you risk.

Your Trade Analysis:

$" + potentialLossPerUnit.toFixed(2) + "

$" + potentialGainPerUnit.toFixed(2) + "

$" + totalPotentialLoss.toFixed(2) + "

$" + totalPotentialGain.toFixed(2) + "

1:" + riskRewardRatio.toFixed(2) + "