Risk Reward Calculator

How risk:reward works

Risk:reward answers one question before you size the trade: if this idea works, does the payoff justify what you put at risk? A setup that risks $1 to make $2 is 2:1. The same setup that risks $1 to make $0.50 is 0.5:1. Expectancy and win rate decide whether either is tradable; the ratio tells you the payoff shape.

The formula has three prices.

1. Entry. Where you get in.
2. Stop loss. Where the idea is wrong. Below the entry for a long, above for a short.
3. Target. Where you plan to take profit.

risk per share    = |entry − stop|
reward per share  = |target − entry|
reward : risk     = reward ÷ risk

Entry $100, stop $95, target $110 is $5 of risk and $10 of reward: 2:1.

Examples

• Clean long, 2:1. Buy $50, stop $48, target $54. Risk $2, reward $4, ratio 2:1.
• Short, 3:1. Short $200, stop $206, target $182. Risk $6, reward $18, ratio 3:1.
• Tight target, sub-1:1. Buy $100, stop $97, target $101. Risk $3, reward $1, ratio 0.33:1. You need a very high win rate for this to pay.

How this pairs with position size

Once you know risk per share, pick the dollars you are willing to lose on the trade and divide. A $100 account risk with a $5 stop distance is 20 shares. Use the free position size calculator for that step. Together the two tools give you the full pre-trade plan: is the payoff worth it, and how many shares keep the loss at your limit.

Common mistakes

• Measuring risk from the entry to a mental stop you will not honor. The ratio is only as honest as the stop you will actually use.
• Moving the target closer after entry without rechecking. A 2:1 plan that becomes 0.8:1 mid-trade is a different trade.
• Ignoring fees and slippage. On small stocks or wide spreads, the real risk is a little larger and the real reward a little smaller than the chart suggests.
• Chasing a high R:R by widening the target into noise. A 5:1 target that never fills is not an edge; it is a backtest fantasy.

Frequently asked questions

Is a higher R:R always better? No. Higher R:R usually means a lower win rate for the same setup. What matters is expectancy: (win rate × average win) − (loss rate × average loss). A 1.5:1 system that wins 55 percent of the time can beat a 4:1 system that wins 20 percent.

Does this work for shorts? Yes. Use absolute distances. Short at $50 with a stop at $52 and a target at $44 is $2 risk and $6 reward: 3:1.

What about futures, options, and crypto? The ratio is the same in any unit. Convert stop and target to dollars (or ticks × tick value, or premium × 100) first, then divide. Fractional crypto size does not change the ratio; it only changes how you size later.

Should I require a minimum R:R? Many discretionary traders set a floor such as 1.5:1 or 2:1 so they never take trades that need an unrealistic win rate. The right floor depends on your setup's historical hit rate, which is what a journal is for.

Track R on every trade in your journal

EdgeDojo stores your stop and target on every trade, computes the R-multiple when you close, and shows the distribution across your history so you can see whether your winners are actually paying for your losers. It is free during open beta. Join the free beta.