The risk/reward ratio is a metric used to measure the potential reward of a trade against its potential risk. It is calculated by dividing the potential profit of a trade by its potential loss.
1. Enter the entry price of your trade.
2. Enter the stop loss price of your trade.
3. Enter the price you aim to take profit at.
4. View your risk/reward ratios and breakeven win rates!
Risk/Reward Ratio: 1:
Breakeven Win Rate %:
A risk/reward ratio of 1:2 means that you are risking $1 to make $2. A higher risk/reward ratio is always better as you have a higher chance to make more profit.
A lower breakeven win rate means that you need to win less trades to be profitable. A 33% breakeven win rate means that you can lose 2 out of 3 trades and still be profitable.
A risk reward calculator, or a win rate calculator, is a tool that helps traders calculate their potential payoff for a given trade relative to their risk.
It is a simple tool that can be used to determine if a trade is worth taking or not.
Ideally, you want to have a risk/reward ratio of 1:2 or higher. This is typically seen as a baseline for most traders to take a trade.
The risk/reward ratio is calculated by the following formula:
Risk/Reward Ratio = (Take Profit - Entry Price) / (Entry Price - Stop Loss Price)
The breakeven win rate is calculated by the following formula:
Breakeven Win Rate = (1 / (Ratio + 1)) * 100
Knowing and understanding your risk/reward ratio for a given trade is used commonly by traders as its a quick and easy way to validate their potential trades. Traders who utilize tools are more likely to be profitable as it can help them stick to their systematic strategies and avoid poor trades.
Let's say you are looking to buy a stock at $10, and you want to set your stop loss at $9.50. You want to take profit at $11.50. This means that you are risking $0.50 to make $1.50. This is a risk/reward ratio of 1:3.
This means that you can lose 2 out of 3 trades and still be profitable. This is because you are risking $0.50 to make $1.50. If you lose 2 trades, you lose $1.00. If you win 1 trade, you make $1.50. This means that you are up $0.50.
Knowing these calculations, we can confidently take this trade as we have a high chance of being profitable.
There are a few ways to improve your risk/reward ratio. The first way is to increase your take profit price. This will increase your risk/reward ratio as you are risking the same amount, but making more profit.
Of course in practise this is not as easy as just taking more profits. You need to have a good understanding of the market and the stock you are trading to determine if the stock will continue to go up or not.
Another way to improve your risk/reward ratio is to decrease your stop loss price. This will increase your risk/reward ratio as you are risking less, but making the same amount of profit.
Many traders utilize tools and analysis techniques to determine trades that may have a high chance of profit. A common technique is to use technical analysis to determine support and resistance levels. Other indicators such as the RSI, MACD, and moving averages can also be used to determine if a stock is in a good position to buy or sell.