Risk Reward Calculator
Quick answer
Risk-reward ratio = potential reward ÷ risk at risk (usually loss to the stop). Rule: a high ratio alone does not win—expectancy also depends on how often you win and whether one loss wipes many small wins after fees.
For a related estimate, see 401k Vs Roth Ira.
Explore further: Compare Investing Strategies · Compare Investment Strategies
What is compared
Dollars at risk at the stop versus dollars to the target (after fees), versus how often you need to be right for expectancy to stay positive. With margin, also use a liquidation price calculator to set cushion versus forced-exit level so a gap cannot erase the plan before the stop.
Risk-reward compares what you can make on a trade to what you will lose if the stop hits—before size and emotion take over. You use it to see whether the payoff ratio survives fees and losing streaks. Good setups define max loss and target first; weak ones start with a price target and work backward. Next step is often a position sizing calculator for that stop distance.
How to use this calculator
- Pick the mode that matches the decision: Invest vs debt is not the same question as real estate vs stocks — do not mix modes.
- Align assumptions once: Return, tax drag, and horizon must be shared across strategies or the score is misleading.
- Read break-evens: If the winner flips when return moves a fraction of a percent, the decision is fragile.
Example: 1:3 payoff ratio
Risk $100 to make $300 (3:1 reward-to-risk). Breakeven win rate ≈ 25% (because $100 ÷ ($300+$100) = 25%). At a 40% win rate, rough expectancy ≈ 0.4×$300 − 0.6×$100 = $60 per trade before fees (illustrative). In this scenario, the same 3:1 ratio with only a 20% win rate flips negative: 0.2×$300 − 0.8×$100 = −$20 per trade before fees—ratio without frequency is incomplete.
Real-world examples
- Leverage magnifies both: Same risk-reward in dollars with 2× leverage roughly doubles both gain and loss at the same prices—liquidation risk moves closer, so size and leverage belong in the same sentence as reward-to-risk. Ground the story in a trading profit calculator so fees do not fake a “good” ratio.
- Sensitivity check: Nudge the rate by about +0.5% and the principal by about −5%. If the payment, break-even, or target amount moves enough to change your decision, you are still on a steep part of the curve where small inputs matter.
Which side wins?
In this scenario, the “winning” plan is the one that survives a string of stop-outs—tight enough risk, enough edge, and size small enough that leverage does not force you out before the math can work.
FAQ
What is a good risk-reward ratio?
There is no universal number — a “good” ratio is one where expected reward justifies risk after fees and your win rate. Many traders discuss 1:2 or 1:3 reward-to-risk; expectancy still depends on how often you win.
What does risk-reward ratio mean in trading?
It is potential profit divided by potential loss at your planned stops and targets (after fees). A 1:2 ratio means you risk $1 to make $2 before costs.
Does a high risk-reward ratio guarantee profit?
No. A wide ratio with a very low win rate can still lose money after fees. Combine ratio with realistic win rate and position sizing.
How does win rate relate to risk-reward?
Breakeven win rate ≈ risk ÷ (reward + risk) in a simple model. Higher reward-to-risk lowers the win rate needed — but only if fills and fees match your assumptions.
Should I set risk or reward first?
Define risk (stop) and position size first so loss is bounded; then set targets that clear fees and match your plan. Moving the stop after the fact to “fix” a ratio breaks the model.