Risk/Reward
Return relative to risk.
What does Risk/Reward mean?
The Risk/Reward ratio measures how much potential profit a trade offers relative to how much you could lose. A ratio of 2:1 means you stand to gain twice as much as you risk losing. Traders and investors use this metric to evaluate whether a trade is worth taking — higher ratios generally indicate more favorable setups, helping to maintain profitability even with a lower win rate.
How to calculate Risk/Reward
The Risk/Reward ratio is calculated with the formula: R:R = (Take Profit − Entry Price) / (Entry Price − Stop Loss). For example, if you buy a stock at $100, set a stop loss at $95, and a take profit at $115, the potential profit is $15, the potential loss is $5, and the ratio is 15 / 5 = 3:1. The profit and loss percentages are calculated relative to the entry price.
FAQ
Most traders aim for a minimum risk/reward ratio of 2:1, meaning the potential profit is at least twice the potential loss. However, the ideal ratio depends on your strategy and win rate. A scalper with a high win rate might accept 1:1, while a swing trader might look for 3:1 or higher.
Risk/reward and win rate are inversely related in practice. With a 3:1 ratio, you only need to win about 25% of your trades to break even. With a 1:1 ratio, you need a 50% win rate. A good trading strategy balances both metrics to achieve consistent profitability.
Using a stop loss is strongly recommended for most trading strategies. It defines your maximum risk on a trade and prevents small losses from turning into catastrophic ones. Without a stop loss, the risk/reward ratio becomes undefined because your potential loss is unlimited.
If the take profit is below the entry price (for a long trade) or the stop loss is above the entry price, the ratio can become negative, indicating the trade setup is inverted. This typically signals an error in the trade plan rather than a valid setup.
This calculator is designed for long (buy) positions where the entry price is above the stop loss and below the take profit. For short trades, the logic is reversed — you would swap the direction, setting the stop loss above entry and take profit below entry.
Related calculators
- ROI— Return relative to investment cost.
- Break-Even— Point where revenue equals cost.
- Profit Margin— Profit as percentage of revenue.
- Percentage Change— Relative increase or decrease.