What is a Risk Reward Ratio?
A risk reward ratio compares the amount of money you are willing to lose on a trade to the amount of money you expect to make. For example, if you risk $100 to make $200, your ratio is 1 to 2. This simple number is one of the most powerful metrics in a trader's arsenal.
Having a positive ratio means you can be wrong more than half of the time and still build your account balance. Many professional traders prioritize setups that offer a high reward relative to the risk. This allows them to handle losing streaks without feeling emotional stress or damaging their long term growth.
How to Calculate the Ratio
Calculating the ratio manually involves finding the distance between your entry price and your exit points.
Step 1: Define Risk
Subtract your stop loss price from your entry price. This is your risk distance.
Step 2: Define Reward
Subtract your entry price from your take profit price. This is your reward distance.
Step 3: Compare
Divide the reward distance by the risk distance to find your ratio.
Our tool automates this process for Forex, Gold, and Bitcoin. It also shows you the exact dollar amounts based on your position size, giving you a complete view of your trade setup before you enter the market.
The Power of Positive Expectancy
The 1 to 2 Advantage
If you use a 1 to 2 ratio, you only need to win 34% of your trades to break even. This takes the pressure off finding a perfect entry every time.
Filtering Trades
Use the calculator to skip trades that offer poor returns. If a setup only offers a 1 to 1 ratio, it might be better to wait for a higher quality opportunity.
Frequently Asked Questions
What is the best risk reward ratio for beginners?
Many educators suggest starting with a 1 to 2 ratio. This provides a safety net while you learn market mechanics and build your discipline.
Can a ratio be too high?
Yes. While a 1 to 10 ratio looks amazing, it is very difficult to achieve because the market is more likely to hit your stop loss before reaching such a distant target.
Does this tool work for short selling?
Absolutely. The calculator detects if your take profit is below your entry and adjusts the math for a sell trade automatically.