Risk/Reward Calculator
Calculate the Risk-to-reward ratio for your trades
📊 Understanding Risk/Reward Ratio
The risk/reward ratio is a fundamental concept in trading that compares the potential profit of a trade to its potential loss. It's calculated by dividing the distance to your take-profit target by the distance to your stop-loss level.
A 1:2 risk/reward ratio means you're risking $1 to potentially make $2. This ratio is crucial because it determines the minimum win rate you need to be profitable over time.
🔍 How Risk/Reward Is Calculated
The calculation involves several key components:
- Entry Price: The price at which you enter the trade
- Stop Loss: The price where you'll exit if the trade goes against you
- Take Profit: The price where you'll exit if the trade goes in your favor
- Risk Distance: The number of pips from entry to stop loss
- Reward Distance: The number of pips from entry to take profit
❓ Frequently Asked Questions
What is a good risk/reward ratio?
A good risk/reward ratio is typically 1:2 or higher. This means you're risking $1 to potentially make $2 or more. With a 1:2 ratio, you only need a 40% win rate to be profitable, while a 1:1 ratio requires a 60% win rate.
How does risk/reward affect my win rate requirements?
The higher your risk/reward ratio, the lower win rate you need to be profitable. For example, with a 1:3 ratio, you only need a 30% win rate, while with a 1:1 ratio, you need a 60% win rate to break even.
Should I always aim for high risk/reward ratios?
While higher ratios are generally better, they should be realistic based on market conditions. Setting unrealistic take-profit targets can result in missed opportunities. Balance your risk/reward ratio with achievable targets.
How do I set realistic stop-loss and take-profit levels?
Set stop-loss levels based on key support/resistance levels or recent market structure. Take-profit levels should be based on significant resistance/support levels or Fibonacci retracements, not arbitrary ratios.