How the risk/reward calculation works
The calculator measures two distances from your entry: how far price can move against you before your stop-loss closes the trade (the risk), and how far it has to travel in your favour to reach the take-profit (the reward). Dividing one by the other gives the ratio.
Direction matters. On a long trade you lose when price falls, so the stop sits below entry and the target above it. On a short trade it is mirrored: the stop sits above entry and the target below. Switching direction in the calculator mirrors your levels automatically so the setup stays valid.
Risk/reward formula
The result is written as 1:x, meaning “for every 1 unit risked, x units of potential reward”. Some traders write the same setup the other way round (2:1 or R:R 0.5); the calculator shows both so there is no ambiguity.
Worked example
You plan to buy a stock at 100, place a stop at 95 and a target at 110.
- Risk per share = 100 − 95 = 5
- Reward per share = 110 − 100 = 10
- Risk/reward = 10 ÷ 5 = 2, so the setup is 1:2
- Break-even win rate = 5 ÷ (5 + 10) = 33.3%
With 20 shares the trade risks 100 and targets 200. On a 10,000 account that is 1% risk for a potential 2% gain. Short example: selling at 100 with a stop at 105 and a target at 90 is also 1:2 — the distances are identical, only mirrored.
What is a good risk/reward ratio?
There is no universally “good” ratio, because the ratio only tells half the story. A 1:3 setup that reaches its target 20% of the time loses money; a 1:0.8 scalp that wins 65% of the time makes money. What matters is the combination of ratio and win rate, which together form your expectancy.
| Ratio | Break-even win rate | Typical use |
|---|---|---|
| 1:1 | 50.0% | Mean-reversion, high-hit-rate systems |
| 1:1.5 | 40.0% | Balanced swing setups |
| 1:2 | 33.3% | Common default for discretionary traders |
| 1:3 | 25.0% | Breakouts and trend following |
| 1:5 | 16.7% | Long-tail trend trades with low hit rates |
Use the expectancy strip under the calculator to see, for your exact ratio, which win rates produce a positive average result. If you know your historical win rate, that comparison is far more useful than any rule of thumb.
Common risk/reward mistakes
- Moving the target to “improve” the ratio. A far-away target raises the ratio on paper but lowers the probability of reaching it. Targets should come from the market structure, not from the ratio you would like.
- Ignoring costs. Spread, commission and slippage widen your real risk and shrink your real reward. Tight stops suffer most because costs are a larger share of a small distance.
- Confusing ratio with position size. Ratio is the same whether you trade 1 share or 1,000. How much money you risk is decided by the position size calculator.
- Judging a trade by its planned ratio after the fact. Planned ratio is a forecast; the outcome is measured as an R-multiple. Comparing the two over many trades shows whether you actually capture the reward you plan for.