Risk Reward Calculator

Risk reward calculator is used to calculate the risk and reward ratio of your investment. The goal of a trader is to minimize risks and maximize rewards. Use the risk reward ratio calculator to assess your risk and reward on any stock you are trying to buy.

What is the risk reward ratio?

The risk reward ratio is what many investors use to decide whether or not to make an investment in an opportunity. In real life, a high reward opportunity often comes with high risk. Therefore, we should always judge the risk involved before we think about the potential rewards.

For stock traders, a good risk reward ratio should be at least 1:3, meaning if you are risking $1 on a trade, you should expect to get at least $3 in return. Many short-term stock traders who ignore the risk-reward ratio are sure to go bust in the long run.

For any type of investment, be it the stock market, crypto, forex, or real estate, if an opportunity gives you less than a 1:2 risk reward ratio,  you should consider passing the opportunity and try to find something better.

How to calculate risk reward ratio?

To calculate the risk reward ratio for any investment, such as stock, we need to use the current stock price, the potential reward, and the stop loss as our risk. The risk reward formula on how to calculate risk reward ratio is given below.

Risk = (Entry - Stop Loss) / Entry
Reward = (Profit Target - Entry) / Entry
Risk Reward = Risk / Reward
Risk Reward Ratio = 1:Reward/Risk

Let's say after extensive research on a company XYZ, we think that its stock has a good chance to rise from the current price of $5 to $8. However, the stock can also fall to $4 a share in the near future if our prediction is wrong.

We want to calculate the risk-reward ratio for this stock and see if it is offering us at least a 1:3 risk reward.

Risk = ($5-$4)/$5 = $1/$5 = 0.2 = 20%
Reward = ($8-$5)/$5 = $3/$5 = 0.6 = 60%
Risk Reward = 20/60 = 0.333
Risk Reward Ratio = 1:3

Therefore, the risk reward for this stock is satisfactory. Please keep in mind that the risk and reward ratio for a stock is an estimate and is based on an investor's research of the company. If XYZ's stock in our example falls too quickly or goes bankrupt, an investor could lose everything.