How much potential reward is shown for each unit of modelled risk?

A risk-reward ratio compares the distance from entry to stop with the distance from entry to target. It describes the geometry of three prices, not the probability that either level will be reached.

Reward divided by risk

Risk = |Entry − Stop loss|Reward = |Target − Entry|Ratio = Reward ÷ Risk

One entry between a stop and target

The default setup uses one entry, one stop and one target. The calculation turns the two price distances into a reward-to-risk multiple and also shows the implied break-even win rate.

Illustrative inputs; currency amounts below use USD. Rates and prices are assumptions, not live quotes.

Entry price
$12.21
Stop loss
$11.50
Target price
$14.50

Step-by-step calculation

  1. Risk distance = |12.21 − 11.5| = 0.71.
  2. Reward distance = |14.5 − 12.21| = 2.29.
  3. Reward per unit of risk = 2.29 ÷ 0.71 = 3.225352:1. This distance ratio does not estimate the chance of reaching either price.

Intermediate figures are rounded for reading. Results use the full calculation precision.

Reward per unit of risk3.23:1
Risk per share$0.71
Reward per share$2.29
Risk5.81%

Reading a multiple and break-even win rate

A result written as 2:1 means the modelled reward is twice the modelled risk. The break-even win rate is a mathematical threshold before costs, not a forecast of strategy performance.

Why a larger ratio is not automatically better

A high ratio can be created by placing an unrealistic target far away. Ratio quality cannot be assessed without execution, win-rate and market-context information.

  • Entry, stop and target are executed at the entered prices.
  • Risk and reward are measured as absolute price distances.
  • Fees, slippage, partial exits and changing stops are excluded.

Calculations related to risk reward ratio

The following tools examine neighbouring parts of the same calculation without changing the inputs or assumptions used above.

References

Sources and conventions

Quick answers

Frequently asked questions

What is a good risk-reward ratio?

A ratio is only meaningful alongside the win rate and costs required for a strategy to break even. For example, a 2:1 reward-to-risk ratio needs wins on more than one-third of trades before costs; the calculator does not judge whether a particular setup is suitable.

Does a higher ratio mean the trade is more likely to win?

No. The ratio measures potential reward against potential risk and contains no probability, volatility or market data.

Why does the calculator use absolute price differences?

Absolute differences keep risk and reward distances positive regardless of the order in which the three prices are entered.

Calculation method and limitations · Report an error

Educational content only. This guide is not financial advice.