TradesMatrix Guide
How to Calculate Risk Reward Ratio
A planned reward-to-risk ratio compares the potential gain to the potential loss between your entry, target, and stop. It describes the plan, not the probability that either price will be reached.
Formula
Reward-to-Risk Ratio = Potential Reward ÷ Potential Risk
For a long trade, risk per unit is entry minus stop and reward per unit is target minus entry. For a short trade, risk per unit is stop minus entry and reward per unit is entry minus target.
Example
For a long entry at ₹100, stop at ₹95, and target at ₹110, planned risk is ₹5 and potential reward is ₹10 per unit. The reward-to-risk ratio is 2:1, before costs and execution differences.
Check before relying on the ratio
- Make sure the stop and target are on the correct sides of entry for the trade direction.
- Include position size to understand the monetary exposure.
- Consider gaps, slippage, fees, and contract specifications.
- A higher ratio does not guarantee a profitable trade; pair it with realistic win-rate assumptions.
Educational information only, not investment or financial advice. Calculator outputs depend on the inputs and assumptions used; they do not predict results or remove trading risk.