Risk reward calculator

How do you calculate the risk reward ratio?

Measure two distances from the entry. For a long trade, risk = entry - stop and reward = target - entry; for a short trade both are reversed. The ratio is R = reward / risk, usually written risk first, as 1 : R.

The default trade buys at $120, places the stop at $114 and the target at $138. The stop is $6 away, 5% of the entry, and the target $18 away, or 15%. Reward divided by risk is 18 / 6 = 3, so the trade is 1 : 3. With 50 shares, $300 is at risk and $900 is targeted.

Traders often call the risk on one trade 1R. Measured that way, this trade risks 1R to make 3R, and every other result can be stated in R too, whatever the share price or currency.

What win rate does a risk reward ratio need to break even?

If every trade ends at either the stop or the target, the wins and losses cancel when win rate = 1 / (1 + R). At 1 : 3, that is 1 / 4 = 25%: one win of 3R pays for three losses of 1R. Below that rate the arithmetic loses money over many trades; above it, the arithmetic makes money.

A ratio on its own says nothing about the outcome. A far target with a low chance of being reached and a near target with a high chance can have the same expectancy. The calculator shows what win rate a ratio needs; only your own trade records can show what win rate you get.

Win rate against ratio: expectancy in R

Expectancy is the average result per trade: expectancy = win rate x R - (1 - win rate), in units of the amount risked. The grid under the calculator works it out for your ratio. Here it is for four common ratios:

Read across a row and the same win rate gives very different averages. Read down a column and a ratio that loses at 30% can pay at 50%. A 40% win rate at 1 : 3 averages +0.60R, which over 100 such trades sums to 60R; at 1 : 1.5 the same 40% averages exactly zero. These are arithmetic illustrations on fixed outcomes, not a forecast for any strategy.

Risk reward for a short trade

A short sale profits when the price falls, so the stop sits above the entry and the target below it. Choose Short and the calculator measures risk as stop minus entry and reward as entry minus target.

Euro example. Short at €80, stop at €84, target at €70. The risk is €4 a share and the reward €10, so the ratio is 1 : 2.5 and the breakeven win rate 1 / 3.5 = 28.57%. Risking €300 on the trade, which is 75 shares, the money targeted is €300 x 2.5 = €750.

If you enter a stop on the wrong side of the entry, the page tells you which way it should go instead of returning a negative ratio. The same applies to a target on the losing side.

Money at risk and money targeted

The ratio is the same whether you trade one share or a thousand. Money only enters when you give a size, in one of two ways.

• A number of shares or units. Money at risk = shares x risk per share, and money targeted = shares x reward per share. On the default trade, 50 shares put $300 at risk against $900 targeted.
• The money you will risk. Money targeted = money at risk x R. In dirhams: enter at AED 25.00 with a stop at AED 24.20 and a target at AED 27.40, and the ratio is 1 : 3. Risking AED 500 targets AED 1,500, which works out at 625 shares.

To turn a cash risk into an exact share count, rounded down so a fill at the stop costs no more than planned, use the position size calculator.

How each price moves the ratio

The three prices do not move the answer equally. Moving the target further away raises the reward and leaves the risk alone, so the ratio rises in a straight line: on the default trade, a target of $126 gives 1 : 1, $132 gives 1 : 2 and $138 gives 1 : 3. Moving the stop closer shrinks the denominator, so the ratio climbs faster and faster as the stop tightens. Moving the entry moves both distances at once, in opposite directions: a better fill lowers the risk and raises the reward together.

That is also the trap. A ratio can be made to look larger by pulling the stop in until ordinary price noise is likely to reach it. The calculator cannot see that; it only divides the distances you give it.

What the ratio leaves out: costs, duty and slippage

The calculator measures price distances only. Real fills shift them.

• Purchase duty in the UK. GOV.UK's guidance on tax when you buy shares says you usually pay 0.5% on the transaction, based on the price you pay. Buying at £4.00 with a stop at £3.80 and a target at £4.50 is 1 : 2.5 on paper. Adding the duty makes the real entry £4.02, which turns the trade into 1 : 2.18 and lifts the breakeven win rate from 28.57% to 31.43%.
• Slippage at the stop. A stop that fills $1 beyond its price on the default trade makes the risk $7, so the ratio falls to 1 : 2.57 and the breakeven win rate rises to 28.00%.
• Commission and spread. Enter prices that already include them, entry a little higher for a long and exits a little worse, and the ratio and breakeven figures will include them too.

The page also assumes every trade ends at the stop or the target. Trades closed early, partial exits and trailing stops all change the real average, which is why trade records matter more than any single ratio.

Risk reward ratio in Excel or Google Sheets

With entry in B2, stop in C2 and target in D2 for a long trade, the ratio is =(D2-B2)/(B2-C2), which returns 3 for the default trade. The breakeven win rate is =1/(1+E2) with the ratio in E2, formatted as a percentage. For a short trade, swap the order inside each bracket: =(B2-D2)/(C2-B2).

To build the expectancy grid, put win rates down column A and ratios across row 1, then enter =$A2*B$1-(1-$A2) in B2 and fill it across and down.

Common risk reward mistakes

• Writing the ratio both ways. 1 : 3 (risk first) and 3 : 1 (reward first) describe the same trade. Check which way a platform or article writes it before comparing.
• Judging a trade by the ratio alone. Without a realistic chance of reaching the target, a large ratio is just a distant number.
• Ignoring costs on short holding periods. On a small stop distance, the spread and commission can be a large share of the risk.
• Moving the stop after entry. Widening it to avoid a loss changes the risk, so the original ratio no longer applies.
• Treating breakeven as a goal. The breakeven win rate is the floor at which the arithmetic stops losing, before costs.

Glossary

Risk per share: the distance from entry to stop. Reward per share: the distance from entry to target. Reward-to-risk ratio (R): reward divided by risk, usually written 1 : R. 1R: the amount risked on one trade, used as a unit. Breakeven win rate: the share of winning trades at which wins and losses cancel, 1 / (1 + R). Expectancy: the average result per trade over many trades, in R or in money. Slippage: the gap between the price you planned and the price you got.

Frequently asked questions

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Sources and review