Risk-to-Reward Calculator
Use our free risk-to-reward calculator to calculate the minimum risk-to-reward ratio required to breakeven.
What is Risk-to-Reward?
Traders and investors use a term called risk-to-reward to describe the potential amount of profit or loss relative to the position size of a trade. Typically, risk-to-reward is expressed as a ratio that compares the relative amount of reward to the amount of risk.
For example, if a trader opens a long position on a stock for $100 and places a stop-loss order at $99 and has a take-profit target price of $103, then the risk-to-reward ratio is 1-to-3.
The risk-to-reward ratio is 1-to-3 because the potential loss is $1 and potential profit is $3 per share, which is three times the amount of risk, or 1-to-3.
Note that the reward is expressed before the risk in the ratio, albeit the term risk-to-reward has the risk before the reward.
Risk-to-reward and Money Management
Consistently profitable trading requires proper money management. One way to employ proper money management is to use a higher risk-to-reward ratio per your estimated probability of winning.
A higher risk-to-reward ratio means that the potential profit is higher than the potential loss, and vice versa. If a trader has a low probability of winning and low risk-to-reward ratio, trading in the red will be the likely outcome.
Typically, the reward should be higher than the risk. By using a higher risk-to-reward ratio, a trader is able to lose trades more frequently and still be profitable in the long-run.
For example, a 2-to-1 risk-to-reward ratio means that a trader needs to win at least 33.33% of their trades to break-even. So if the trader has a probability of winning that is greater than 33.33%, then the trader will be consistently profitable.
