What a Risk-Reward Ratio Calculator Tells You
A Risk-Reward Ratio Calculator helps you measure the balance between what you could lose and what you could gain on a trade. It is commonly used in trading and investing to evaluate whether a setup is worth taking before placing an order. Risk-reward is not a guarantee of profit. It is a planning tool that becomes powerful when you pair it with a realistic win rate and consistent position sizing.
The simplest definition is: risk is the amount you lose if the stop loss is hit, and reward is the amount you gain if your target is hit. A 1:2 risk-reward ratio means you are risking one unit to try to make two units. Many strategies can be profitable with lower ratios if they have higher win rates, while other strategies can be profitable with high ratios even with modest win rates.
How Risk and Reward Are Calculated From Entry, Stop, and Target
For a long trade (buy first), risk is the distance from entry down to the stop loss, and reward is the distance from entry up to the target. For a short trade (sell first), risk is the distance from entry up to the stop loss, and reward is the distance from entry down to the target.
Short: Risk = Stop − Entry, Reward = Entry − Target
The risk-reward ratio is then computed as Reward ÷ Risk. If risk is very small, the ratio can appear extremely high, but that may be unrealistic because slippage and spread can overwhelm tiny stops. This is why modeling fees and slippage matters, especially in fast markets or low-liquidity instruments.
Breakeven Win Rate: The Win Percentage You Need to Not Lose Money
Breakeven win rate answers a simple question: given your average win and average loss, what win rate do you need so your strategy does not lose money over time? If your average win is larger than your average loss, you can be wrong more often and still break even. If your average win is small relative to your loss, you need a higher win rate to compensate.
When you include fees, your effective average win decreases and your effective average loss increases. That pushes the breakeven win rate higher. This calculator lets you view breakeven based on net outcomes so you can avoid overestimating profitability.
Position Sizing: Turning Risk Into a Concrete Trade Size
Many traders understand risk-reward but still struggle with consistent risk management. Position sizing solves that. Instead of trading an arbitrary number of shares or contracts, you define a risk budget, such as 1% of your account. Then you compute how many units you can trade so that a stop-out costs approximately that amount.
This calculator supports value-per-point so you can handle instruments where price movement does not map 1:1 to profit and loss. For example, some futures contracts or CFDs have a contract multiplier. If you enter the value per 1.0 price move, the tool can convert price risk into money risk per unit and compute a position size automatically.
Expectancy: Why Win Rate and R:R Must Be Viewed Together
A strategy becomes mathematically favorable when it has positive expectancy. Expectancy is the average amount you can expect to make (or lose) per trade over a large sample, based on win rate, average win, and average loss. In simple terms:
A high risk-reward ratio does not guarantee positive expectancy because you might not hit targets often enough. Similarly, a high win rate does not guarantee profitability if your losses are much larger than your wins. Expectancy forces you to consider both sides of the equation, and costs make that equation stricter.
Using Scenarios to Stress-Test a Trading Idea
The scenario mode in this tool helps you quickly test combinations of risk-per-trade, risk-reward ratio, win rate, and fees over a chosen number of trades. It is not a market simulator. It is a mathematical sanity check. If the numbers show a negative expected total, your plan likely needs improvement: either better entries that increase reward, tighter risk management, a higher win rate, or lower friction from costs.
A key benefit is clarity. Many trading mistakes come from guessing. A calculator makes assumptions explicit and forces you to see whether a setup is structurally favorable.
Common Mistakes When Using Risk-Reward Ratios
- Ignoring fees and slippage, especially for small targets or tight stops
- Using an unrealistic target that is rarely reached, lowering real win rate
- Moving stops emotionally, which increases actual losses beyond planned risk
- Oversizing positions, turning small mistakes into large drawdowns
- Optimizing R:R without measuring win rate and expectancy together
How to Use This Risk-Reward Ratio Calculator Well
Start by entering entry, stop loss, and target to compute the core ratio. Then add fees to see whether your net reward is still attractive. Next, define account size and risk-per-trade to calculate position size. Finally, estimate expectancy using your historical win rate and average win/loss values. If expectancy is negative, focus on improving the components you can control: trade selection, stop placement, target structure, and trading costs.
Over time, the most consistent improvement comes from treating this tool as part of a repeatable process: plan trades, size them consistently, journal results, update your statistics, and refine your assumptions.
Limitations and Assumptions
This tool assumes constant outcomes for wins and losses and does not model partial exits, trailing stops, scaling, gap risk, extreme volatility, or changing spreads. Use it for planning and risk discipline, not as a prediction engine.
FAQ
Risk-Reward Ratio Calculator – Frequently Asked Questions
Answers to common questions about R:R, breakeven win rate, position sizing, costs, and expectancy.
Risk-reward ratio compares how much you risk on a trade to how much you aim to make. For example, risking $100 to target $200 is a 1:2 risk-reward ratio.
Risk is the distance between entry and stop loss. Reward is the distance between entry and target. For long trades risk = entry − stop, reward = target − entry. For short trades risk = stop − entry, reward = entry − target.
Breakeven win rate is the minimum win percentage needed to avoid losing money, given your average win and loss. Higher reward relative to risk reduces the breakeven win rate.
Position sizing sets how many shares/units/contracts you trade so your loss at the stop equals your chosen risk (like 1% of your account). It helps control drawdowns and standardize risk per trade.
No. Profitability depends on both win rate and average win/loss. A high R:R can still lose money if the win rate is too low, or if slippage and fees reduce real reward.
Expectancy estimates average profit per trade using win rate, average win, and average loss. Positive expectancy suggests your strategy may be profitable over many trades, assuming conditions remain similar.
Fees and slippage reduce your net reward and can increase your net risk. This calculator includes an option to model costs so you can see an adjusted R:R and breakeven win rate.
Yes. Risk-reward math works across markets. If you trade instruments with pip or contract multipliers, you can enter a value-per-point to convert price movement into money risk and reward.
Yes. You can export trade planning tables and scenario outputs to CSV for journaling and analysis.