Risk to Reward Calculator

Risk to Reward Ratio Calculator

Use this calculator to determine the potential profit (reward) relative to the potential loss (risk) of a trade or investment. Understanding your risk to reward ratio is a fundamental aspect of effective risk management.

function calculateRiskReward() { var entryPrice = parseFloat(document.getElementById('entryPrice').value); var stopLossPrice = parseFloat(document.getElementById('stopLossPrice').value); var takeProfitPrice = parseFloat(document.getElementById('takeProfitPrice').value); var resultDiv = document.getElementById('riskRewardResult'); if (isNaN(entryPrice) || isNaN(stopLossPrice) || isNaN(takeProfitPrice) || entryPrice <= 0 || stopLossPrice < 0 || takeProfitPrice = 2) { interpretation = 'This is generally considered a favorable ratio, indicating that your potential gain is significantly higher than your potential loss.'; } else if (riskRewardRatio >= 1) { interpretation = 'This is a balanced or slightly favorable ratio. Many traders aim for at least 1:1 or higher.'; } else { interpretation = 'This ratio indicates that your potential loss is greater than your potential gain, which is generally considered unfavorable for long-term profitability.'; } resultDiv.innerHTML = '

Calculation Results:

' + 'Potential Loss: $' + potentialLossFormatted + " + 'Potential Gain: $' + potentialGainFormatted + " + 'Risk to Reward Ratio: 1 : ' + ratioFormatted + " + '' + interpretation + ''; } .risk-reward-calculator { font-family: 'Segoe UI', Tahoma, Geneva, Verdana, sans-serif; background-color: #f9f9f9; padding: 25px; border-radius: 10px; box-shadow: 0 4px 12px rgba(0, 0, 0, 0.1); max-width: 600px; margin: 30px auto; border: 1px solid #e0e0e0; } .risk-reward-calculator h2 { color: #2c3e50; text-align: center; margin-bottom: 20px; font-size: 1.8em; } .risk-reward-calculator p { color: #34495e; line-height: 1.6; margin-bottom: 15px; } .calculator-inputs label { display: block; margin-bottom: 8px; color: #34495e; font-weight: bold; font-size: 0.95em; } .calculator-inputs input[type="number"] { width: calc(100% – 22px); padding: 12px; margin-bottom: 18px; border: 1px solid #ccc; border-radius: 6px; font-size: 1em; box-sizing: border-box; transition: border-color 0.3s ease; } .calculator-inputs input[type="number"]:focus { border-color: #007bff; outline: none; box-shadow: 0 0 5px rgba(0, 123, 255, 0.2); } .calculator-inputs button { background-color: #007bff; color: white; padding: 12px 25px; border: none; border-radius: 6px; cursor: pointer; font-size: 1.1em; display: block; width: 100%; margin-top: 10px; transition: background-color 0.3s ease, transform 0.2s ease; } .calculator-inputs button:hover { background-color: #0056b3; transform: translateY(-2px); } .calculator-results { margin-top: 25px; padding: 20px; background-color: #e9f7ef; border: 1px solid #d4edda; border-radius: 8px; color: #155724; } .calculator-results h3 { color: #2c3e50; margin-top: 0; margin-bottom: 15px; font-size: 1.5em; border-bottom: 1px solid #d4edda; padding-bottom: 10px; } .calculator-results p { margin-bottom: 10px; font-size: 1.05em; } .calculator-results p strong { color: #0056b3; } .calculator-results p em { display: block; margin-top: 10px; font-size: 0.9em; color: #555; }

Understanding the Risk to Reward Ratio

The Risk to Reward Ratio (RRR) is a crucial metric used by traders and investors to evaluate the potential profitability of a trade relative to its potential loss. It helps in making informed decisions about whether a particular trade is worth taking, given the inherent risks.

Why is it Important?

• Risk Management: It's a cornerstone of effective risk management, helping you define how much you're willing to lose versus how much you stand to gain.
• Strategy Evaluation: By consistently applying a favorable RRR, you can maintain profitability even if your win rate isn't exceptionally high. For example, with a 1:2 RRR, you only need to win 34% of your trades to break even.
• Discipline: It encourages disciplined trading by forcing you to pre-define your exit points (stop loss and take profit) before entering a trade.

How to Calculate It

The basic formula for the Risk to Reward Ratio is:

Risk to Reward Ratio = Potential Gain / Potential Loss

To use the calculator above, you need three key prices:

1. Entry Price: The price at which you plan to open your trade.
2. Stop Loss Price: The price at which you will close your trade to limit potential losses.
3. Take Profit Price: The price at which you will close your trade to secure potential profits.

The calculator then determines:

• Potential Loss: The difference between your Entry Price and your Stop Loss Price.
• Potential Gain: The difference between your Take Profit Price and your Entry Price.

Interpreting the Ratio

• 1:1 Ratio (e.g., 1.00): Your potential gain is equal to your potential loss. You would need a win rate of over 50% to be profitable after accounting for commissions.
• 1:2 Ratio (e.g., 2.00): Your potential gain is twice your potential loss. This is often considered a good ratio, as you can be profitable even with a win rate below 50%.
• 2:1 Ratio (e.g., 0.50): Your potential loss is twice your potential gain. This is generally considered unfavorable, as you would need a very high win rate (over 66%) to be profitable.

Most professional traders aim for a Risk to Reward Ratio of at least 1:1.5 or 1:2, meaning they seek to gain at least 1.5 to 2 times more than they risk on any given trade.

Example Scenario:

Let's say you are considering buying a stock:

• 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)

Using the calculator:

• Potential Loss = $50.00 – $48.00 = $2.00
• Potential Gain = $56.00 – $50.00 = $6.00
• Risk to Reward Ratio = $6.00 / $2.00 = 3.00

This gives you a 1:3 Risk to Reward Ratio, which is highly favorable. For every $1 you risk, you stand to gain $3.