Risk/Reward Ratio Explained (With a Simple Calculator Workflow)
By William · Swift Penguin · Educational content · Not financial advice
Risk/reward is the adult version of “is this trade worth it?” Before entries and indicators, define how much you lose if wrong and how much you make if right. Here’s the clean framework.
Learn the risk/reward formula, why 1:2 is a common bar, and how to reject weak trades before you size them. Pair it with our free risk reward calculator.
The definition
Risk is the distance from entry to stop. Reward is the distance from entry to target. The ratio is reward ÷ risk (often written as 1:2).
If you risk $100 to make $200, you’re trading at 1:2 — every win pays for two equal losses.
Worked example
Long entry $50, stop $47, target $56 → risk $3, reward $6 → ratio 1:2.
On 100 shares that’s $300 risked for $600 potential. Whether you take it depends on your minimum ratio and whether those levels are realistic on the chart.
Win rate still matters
A beautiful ratio with a fantasy target is useless. Track average R (how many R you make when you win vs lose) in a journal.
High win-rate systems can live with tighter ratios; lower win-rate trend systems need fatter targets.
Workflow that sticks
Mark stop and target first → run the risk reward calculator → if the ratio clears your bar, size with a position size calculator → only then place the order.
Practice the habit in a paper simulator until skipping bad ratios feels automatic.
Next steps
Concepts stick when you apply them. Open a related calculator, run your own numbers, and — if you’re still learning execution — practice with paper trades before increasing real size. Browse more guides or the full set of free trading tools.
Free tool
Risk Reward Calculator
Enter entry, stop-loss, and target to get your risk/reward ratio, potential profit vs loss, and whether the setup clears a 2:1 (or better) bar. Pair it with position sizing so every idea has defined upside and downside.
Other free tools
- Stock Market Simulator — Practice trading with fake money.
- Trading 212 Portfolio Charts — Connect T212 and flex your P&L.
- Crypto Prices & Charts — Live quotes + historic charts.
Put this into practice
Run the numbers on our free tools, or paper trade before you risk real money.
This is educational content, not financial advice. Investing carries risk — you can lose money. Do your own research and consider a qualified advisor for personal decisions.