Quick Answer
Risk-to-reward ratio is calculated as (Target Price − Entry Price) ÷ (Entry Price − Stop Loss Price), a ratio of 1:2 means you stand to gain twice as much as you're risking on the trade.
What Is Risk / Reward?
Risk-to-reward ratio (R:R) compares how much a trader is risking on a trade (the distance from entry to stop loss) against how much they stand to gain (the distance from entry to target/take-profit). It's one of the most fundamental concepts in trading risk management, because it directly affects how often a strategy needs to be 'right' to be profitable overall.
A key insight many new traders miss: you don't need a high win rate to be profitable if your risk-to-reward ratio is favorable. With a 1:3 risk-to-reward ratio, a trader can be wrong 70% of the time and still break even, because each winning trade is three times larger than each losing trade. This is why many professional trading strategies emphasize R:R discipline over win-rate alone.
Risk-to-reward should be evaluated before entering a trade, based on a realistic stop loss and target, not adjusted after the fact to justify a trade that's already been taken, which defeats its purpose as a planning tool.
How to Use
- 1Enter your planned entry price.
- 2Enter your stop loss price (where you'll exit if the trade goes against you).
- 3Enter your target/take-profit price (where you plan to exit if the trade goes in your favor).
- 4The calculator returns your risk-to-reward ratio for the trade.
Formula
R:R = (Target − Entry) ÷ (Entry − Stop Loss)For a long/buy position; reverse the subtraction order for a short/sell position
Example: Buy entry at $50, stop loss at $48, target at $56
- Entry = $50, Stop Loss = $48, Target = $56
- Risk = Entry − Stop Loss = 50 − 48 = $2
- Reward = Target − Entry = 56 − 50 = $6
- R:R = 6 ÷ 2
Tips & Things to Know
- A favorable risk-to-reward ratio (1:2 or better) means a trading strategy can still be profitable even with a win rate below 50%, which is why many professional traders prioritize R:R over chasing a high win rate alone.
- Set your stop loss based on where your trade idea is genuinely invalidated (a technical or fundamental level), not based on reverse-engineering a desired R:R ratio, an unrealistic stop loss placed just to improve the ratio undermines the analysis.
- Combining win rate with risk-to-reward gives the full picture, calculate your expectancy (average win × win rate − average loss × loss rate) for a more complete view of strategy profitability over many trades.
- Market conditions (volatility, support/resistance levels) should inform realistic stop loss and target placement, arbitrarily wide targets just to improve the ratio rarely reflect real probability of the price reaching them.