Finance & Economics · Portfolio Management · Portfolio Risk
Risk-Reward Ratio Calculator
Calculate the risk-reward ratio for any trade by comparing potential profit against potential loss from entry, target, and stop-loss levels.
Calculator
Formula
RR is the risk-reward ratio (expressed as 1:RR). P_{target} is the target price (take-profit level). P_{entry} is the trade entry price. P_{stop} is the stop-loss price. The numerator represents potential reward (profit if target is hit); the denominator represents potential risk (loss if stop is triggered). A ratio above 1.0 means potential profit exceeds potential loss.
Source: Schwager, J. D. (1984). A Complete Guide to the Futures Market. Wiley. Standard practice in quantitative trading and risk management literature.
How it works
Every trade has three critical price levels: the entry price where you open the position, the stop-loss price where you exit to cap losses, and the target price (take-profit) where you exit to realize gains. The distance from entry to target defines your reward; the distance from entry to stop-loss defines your risk. The risk-reward ratio simply divides one by the other to produce a dimensionless number that characterizes the trade's quality at a glance.
The formula is straightforward: RR = |Ptarget − Pentry| / |Pentry − Pstop|. A result of 2.0 means the trade targets twice as much profit as it risks in loss — commonly written as a 1:2 ratio. The absolute values ensure the formula works symmetrically for both long trades (where Ptarget > Pentry > Pstop) and short trades (where Ptarget < Pentry < Pstop). An equally important derived metric is the break-even win rate — the minimum percentage of trades that must be profitable for a strategy to at least break even — calculated as 1 / (1 + RR).
Institutional traders and systematic funds typically require a minimum RR of 1.5:1 or 2:1 before entering a trade. At a 2:1 ratio, a trader only needs to be right on 34% of trades to break even, providing substantial margin for error. This asymmetry is what allows professional traders to survive extended losing streaks while remaining profitable over large sample sizes. The RR ratio is used across equities, futures, forex, cryptocurrency, and options markets wherever discrete entry and exit levels can be defined.
Worked example
Consider a long trade in a stock currently priced at $100.00. Technical analysis suggests a support level at $95.00, which you use as your stop-loss, and a resistance target at $115.00, which you set as your take-profit. You plan to purchase 200 shares.
Step 1 — Calculate reward per share: |$115.00 − $100.00| = $15.00
Step 2 — Calculate risk per share: |$100.00 − $95.00| = $5.00
Step 3 — Compute the RR ratio: $15.00 ÷ $5.00 = 3.0, so this is a 1:3 risk-reward setup.
Step 4 — Dollar-value totals: Potential profit = $15.00 × 200 = $3,000. Potential loss = $5.00 × 200 = $1,000.
Step 5 — Break-even win rate: 1 / (1 + 3.0) = 25%. This means the strategy needs to win only 25% of the time to break even before commissions, making it highly favorable from a probability standpoint.
This setup is considered excellent by most professional standards. Even if three out of four identical trades hit their stop-loss, the single winner would recover all losses and leave a net profit of zero — and any win rate above 25% produces positive expectancy.
Limitations & notes
The risk-reward ratio is a pre-trade planning metric and does not guarantee outcomes — actual prices may gap through stop-loss levels during high-volatility events such as earnings releases, economic data prints, or liquidity crises, causing realized losses to exceed the planned risk. The ratio also says nothing about the probability of reaching the target versus the stop-loss; a 1:5 ratio is meaningless if the target is reached only 5% of the time. It must always be paired with a realistic win-rate estimate to compute expected value. Additionally, the calculator assumes fixed, static price levels, whereas dynamic stops (trailing stops, volatility-adjusted stops) change the effective ratio over the life of a trade. Transaction costs, slippage, and borrowing costs for short positions reduce net reward and are not captured here. Finally, the ratio is most applicable to directional trades with clearly defined levels; it is less directly applicable to spread trades, options strategies with non-linear payoffs, or multi-leg positions.
Frequently asked questions
What is a good risk-reward ratio for trading?
Most professional traders target a minimum ratio of 1:2 (risking $1 to make $2), which requires only a 34% win rate to break even. Many trend-following systems use 1:3 or higher. The optimal ratio depends on your strategy's realistic win rate — a high-probability mean-reversion system may be profitable at 1:1 with a 60%+ win rate, while a trend-following system may require 1:3 to compensate for a 30% win rate.
How does risk-reward ratio relate to win rate and expected value?
Expected value per trade = (Win Rate × Reward) − (Loss Rate × Risk). A 1:2 RR with a 40% win rate gives EV = (0.40 × 2) − (0.60 × 1) = +0.20 per unit risked, which is profitable. Always analyze RR together with your realistic win rate — a favorable RR ratio with a win rate below the break-even threshold still produces a losing strategy.
Does the risk-reward ratio work the same for short trades?
Yes. For a short trade, the stop-loss is above the entry price and the target is below it. The absolute value formula |P_target − P_entry| / |P_entry − P_stop| handles this automatically. Enter your short entry, a higher stop-loss, and a lower target price — the calculator will produce the correct ratio regardless of direction.
What is the break-even win rate and how is it calculated?
The break-even win rate is the minimum percentage of winning trades needed for a strategy to produce zero net profit over many trades. It is calculated as 1 / (1 + RR). For a 1:2 ratio, break-even win rate = 1 / (1 + 2) = 33.3%. If your actual win rate exceeds this, the strategy has positive expectancy; if it falls below, the strategy loses money in the long run despite the favorable ratio.
Should I use a fixed percentage or price levels for my stop-loss?
Both approaches are used by professionals. Price-level stops (support/resistance, moving averages, ATR-based bands) are generally considered more technically sound because they reflect actual market structure rather than an arbitrary percentage. Fixed-percentage stops are simpler and ensure consistent position sizing. Many systematic traders combine both — they set a technical stop-loss level and then verify it represents an acceptable percentage of capital before entering the trade.
Last updated: 2025-01-15 · Formula verified against primary sources.