Risk/Reward Calculator
Calculate your exact Risk/Reward Ratio based on your entry, stop loss, and take profit levels. Understand the required win rate for your trading strategy.
Trade Levels
Risk Analysis Output
The Math Behind Profitable Trading
The secret to profitable trading isn't having a 90% win rate. It's having positive expectancy. Positive expectancy is created when your Risk/Reward (R/R) ratio perfectly balances out your win rate.
The Risk/Reward ratio simply compares how much money you stand to lose if your Stop Loss is hit, versus how much money you stand to make if your Take Profit is hit. A 1:2 R:R means you risk $100 to make $200.
How the Breakeven Win Rate Works
When your Risk/Reward ratio changes, the mathematical win rate required just to avoid losing money changes drastically:
- 1:1 Ratio: You must win 50% of your trades to break even.
- 1:2 Ratio: You must win 33% of your trades to break even.
- 1:3 Ratio: You must win 25% of your trades to break even.
- 1:5 Ratio: You must win 17% of your trades to break even.
This means if you structure your trades to always target a 1:3 ratio, you can literally be wrong 7 out of 10 times and still be profitable.
Why Retail Traders Fail
Retail traders often boast about a 90% win rate. The problem? They are scalping 2 points of profit but holding losing trades for 20 points before cutting the cord.
If your average win is $20 and your average loss is $200, your Risk/Reward ratio is 1:0.1. At that ratio, you need a 91% win rate literally just to break even. The moment market volatility shakes you out, that math guarantees your account will be blown.
Frequently Asked Questions (FAQ)
Is a higher Risk/Reward ratio always better?
Not necessarily. The wider your take profit, the less likely price is to reach it before reversing. A 1:10 ratio sounds amazing until you realize your strategy only hits the target 5% of the time (making it an unprofitable strategy). You must backtest to find the optimal ratio for your specific system.
Does Risk/Reward calculate position size?
No. R:R only defines the distance between price levels. To translate that into dollar risk based on your overall account equity, you must combine it with proper Position Sizing.
The tools and calculators provided on The Simple Toolbox are intended for educational and informational purposes only. They do not constitute financial, legal, tax, or professional advice. While we strive to keep calculations accurate, numbers are based on user inputs and standard assumptions that may not apply to your specific situation. Always consult with a certified professional (such as a CPA, financial advisor, or attorney) before making significant financial or business decisions.
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