Forex Trading Tools

Risk to Reward Calculator

This risk to reward calculator helps with finding minimum risk/reward ratio or win rate to achieve breakeven in trades.

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How to Calculate Risk Reward Ratio

Calculating the risk-reward ratio is a fundamental aspect of trading and investing. It helps you assess the potential return of an investment relative to its risk. Here’s how to calculate it:

  1. Identify Entry and Exit Points: Determine the price at which you enter a trade (entry point) and the price at which you plan to exit the trade (exit point).

  2. Calculate Potential Profit and Loss: Determine the potential profit and loss for the trade. This is the difference between the entry and exit prices.

  3. Calculate Risk-Reward Ratio: Divide the potential profit by the potential loss to get the risk-reward ratio.

    Risk-Reward Ratio = Potential Profit / Potential Loss

    If the potential profit is greater than the potential loss, you’ll have a ratio greater than 1, indicating a potentially favorable trade. If the potential loss is greater than the potential profit, the ratio will be less than 1, suggesting a less favorable trade.

For example, let’s say you plan to buy a stock at $50 and set a stop-loss order at $45 (risking $5 per share) and set a profit target at $60 (potentially gaining $10 per share).

Potential Profit = $60 – $50 = $10 Potential Loss = $50 – $45 = $5

Risk-Reward Ratio = $10 / $5 = 2

In this scenario, the risk-reward ratio is 2, indicating that for every dollar risked, you have the potential to gain $2. A ratio greater than 1 is generally considered favorable, as it means the potential profit outweighs the potential loss. However, it’s essential to consider other factors like probability of success and overall market conditions when making trading decisions.

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