Risk reward calculator

Worked example

You buy a coin at $2,000 with the stop at $1,960 and the target at $2,100. The stop is $40 away and the target is $100 away, so you stand to make $100 for every $40 you risk. That is 1 to 2.5.

With a $5,000 account risking 1%, the most this trade may cost is $50, which sizes the position at 1.25 coins. If the stop fills you lose $50. If the target fills you make 1.25 × $100 = $125.

Here is the part most people skip. At 1 to 2.5, one win pays for two and a half losses, so trades like this come out ahead once more than 28.57% of them reach the target. Win 3 out of 10 and you are up: 3 × $125 = $375 against 7 × $50 = $350.

Pull the target in to $2,040 and the ratio falls to 1 to 1. Now you need to win more than half the time just to stand still.

The formula

Risk to reward = |target − entry| ÷ |entry − stop|. Win rate needed to break even = 1 ÷ (1 + reward ÷ risk). Position size = (account × risk %) ÷ |entry − stop|.

The calculator reads the side from the stop: below the entry is a long, above it is a short, and the target has to sit on the other side. Fees and slippage make every real ratio a little worse than the one on paper, so leave some room above the break-even win rate. To size a trade with leverage, use the position size calculator.

Questions and answers

How do you calculate the risk reward ratio?

Divide the distance to the target by the distance to the stop. Entry $2,000, stop $1,960 and target $2,100 give $100 ÷ $40 = 2.5, so the trade risks 1 to make 2.5.

What is a good risk reward ratio?

It depends on how often you win. At 1 to 1 you need to win more than 50% of trades, at 1 to 2 more than 33.33%, and at 1 to 3 more than 25%. A ratio only means something next to how often your targets are really hit.

What win rate do I need to be profitable?

One divided by one plus the ratio. At 1 to 2.5 that is 1 ÷ 3.5 = 28.57%. Win more often than that and trades like this one make money over time, before fees.

Is it written 1:3 or 3:1?

Both are used for the same trade. Risk to reward is written 1:3 and reward to risk 3:1. Either way it means you risk $1 to make $3.

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