Reward to Risk Ratio Calculator
Use this calculator to determine the potential Reward vs. the potential Risk for a trade or investment setup. Enter your expected maximum profit and your defined maximum loss (stop-loss). The ratio will help you assess the potential value of the opportunity relative to its risk.
Ensure you use the same unit (e.g., dollars, pips, points) for both potential profit and potential loss.
Calculate Your R:R Ratio
Understanding the Reward to Risk Ratio
What is R:R Ratio?
The Reward to Risk Ratio (or Risk/Reward Ratio) is a measure used by traders and investors to evaluate the potential return they could make on a trade compared to the potential loss they could incur. It's a fundamental concept in risk management.
How it's Calculated:
The formula is straightforward:
Reward : Risk = Potential Profit / Potential Loss
It is usually expressed as a ratio compared to 1 (e.g., 2:1, 3:1).
Why is it Important?
A favorable R:R ratio indicates that the potential gains outweigh the potential losses. Combined with a strategy's winning percentage, it helps determine if a trading approach is likely to be profitable over time. Even with a winning percentage below 50%, you can be profitable if your winning trades have a significantly higher R:R ratio than your losing trades (which effectively have a 1:1 risk ratio).
Reward to Risk Ratio Examples
Here are some common scenarios:
Example 1: Simple 2:1 Ratio
Scenario: You risk $50 on a trade with a target profit of $100.
Calculation: $100 (Profit) / $50 (Loss) = 2
Result: R:R Ratio is 2:1. For every $1 risked, you expect to gain $2.
Example 2: Aiming for 3:1
Scenario: You define your stop-loss at 75 pips, and your profit target at 225 pips.
Calculation: 225 (Profit) / 75 (Loss) = 3
Result: R:R Ratio is 3:1. You aim for 3 times the points you risk.
Example 3: Ratio Less Than 1:1
Scenario: Your target profit is $25, but your stop-loss requires risking $50.
Calculation: $25 (Profit) / $50 (Loss) = 0.5
Result: R:R Ratio is 0.5:1. You risk twice what you stand to gain. Generally considered unfavorable unless winning percentage is very high.
Example 4: 1:1 Ratio
Scenario: Potential profit is $100, potential loss is $100.
Calculation: $100 (Profit) / $100 (Loss) = 1
Result: R:R Ratio is 1:1. Profit equals Risk.
Example 5: Using Decimals
Scenario: You calculate a target 1.75 points above entry and a stop 0.85 points below entry.
Calculation: 1.75 (Profit) / 0.85 (Loss) ≈ 2.058
Result: R:R Ratio is approximately 2.06:1.
Example 6: Larger Values
Scenario: Expected gain of £5,000, risk of £1,250.
Calculation: £5000 (Profit) / £1250 (Loss) = 4
Result: R:R Ratio is 4:1.
Example 7: Break-Even Calculation (Conceptual)
Scenario: If your strategy has a 2:1 R:R, what winning percentage is needed to break even?
Calculation: Required Win Rate = 1 / (1 + R:R) = 1 / (1 + 2) = 1/3 ≈ 33.3%.
Conclusion: With a 2:1 R:R, you only need to win slightly more than 33.3% of your trades to be profitable (before costs).
Example 8: Negative R:R (Invalid Input)
Scenario: You accidentally enter a negative number for profit or loss.
Calculator Behavior: The calculator will show an error message "Profit and loss must be non-negative values."
Example 9: Zero Loss (Invalid Input)
Scenario: You enter 0 for potential loss.
Calculator Behavior: The calculator will show an error message "Potential loss cannot be zero." Risk is inherent in trading.
Example 10: Interpreting the Ratio
Scenario: The calculator gives you a ratio of 1.85:1.
Interpretation: This means for every $1 (or unit) you risk on this trade, you stand to potentially gain $1.85 (or 1.85 units). It's a favorable ratio where potential reward is significantly higher than potential risk.
Frequently Asked Questions about Reward to Risk Ratio
1. What is the Reward to Risk Ratio (R:R)?
It's a calculation that compares the potential profit of a trade to its potential loss. It helps evaluate if a trade's potential gain is worth the risk involved.
2. How do I calculate it manually?
Divide your Potential Profit by your Potential Loss. For example, $200 Profit / $100 Loss = 2 (or 2:1).
3. What inputs does this calculator need?
It requires two inputs: your expected Potential Profit and your defined Potential Loss (where you would exit the trade if it goes against you, typically your stop-loss level).
4. Should I use dollars, pips, or points for the inputs?
You can use any consistent unit. The ratio itself is unitless. If you enter $100 profit and $50 loss, the result (2:1) is the same as entering 100 pips profit and 50 pips loss.
5. What is considered a "good" R:R ratio?
There's no universal answer. Many traders aim for 2:1, 3:1, or higher. A higher ratio means you can be profitable even with a lower winning percentage. Your optimal R:R depends heavily on your trading strategy's typical win rate.
6. Can the potential loss be zero?
No. Every trade involves risk, and the calculator prevents division by zero. Your potential loss should be defined by your stop-loss, which is always greater than zero.
7. Does a high R:R ratio guarantee a winning trade?
Absolutely not. The R:R ratio assesses the *potential* payout if the trade is successful. It doesn't tell you the *probability* of success. You need a trading edge and a solid strategy with a proven win rate to achieve profitability over time.
8. What does a ratio like 0.75:1 mean?
It means your potential profit is only 0.75 units for every 1 unit you risk. This is generally considered an unfavorable setup unless your strategy has a very high win rate (e.g., consistently winning over 60-70% of trades).
9. How does R:R relate to winning percentage?
They work together for overall profitability. Break-even Win Rate = 1 / (1 + R:R). A higher R:R means you need a lower winning percentage to break even or be profitable. A lower R:R requires a higher winning percentage.
10. Why is risk management important alongside R:R?
Calculating R:R is part of risk assessment *per trade*. Overall risk management also involves position sizing (how much capital you risk per trade) and portfolio diversification, ensuring that no single loss can significantly harm your total capital.
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