What Is Risk Reward Ratio?
The risk reward ratio compares the potential profit of a trade to the potential loss. A 1:2 ratio means you risk $1 to potentially make $2. Professional traders typically look for setups with at least a 1:2 ratio to stay profitable over time.
How to Calculate Position Size
Position sizing determines how many units to trade based on your account balance and risk tolerance. The formula is:
Position Size = (Account Balance × Risk %) ÷ Stop Loss Distance
For example, with a $10,000 account, 2% risk, and a 50-pip stop loss, your risk amount is $200 and your position size is calculated accordingly.
Key Metrics Explained
- R:R Ratio — Reward divided by risk. Aim for 1.5 or higher.
- Position Size — Units/lots/shares to trade based on your risk.
- Break-even Win Rate — Minimum win rate needed to be profitable with this R:R.
- Expected Value — Long-term profitability per trade at 50% win rate.
Why Risk Management Matters
Even a strategy with a 40% win rate can be highly profitable with a 1:3 risk reward ratio. Proper risk management is what separates profitable traders from losing ones over the long term.
Never risk more than 1–3% of your account on a single trade. Consistent small risks compound into significant gains while protecting you from account wipeouts.
Stop Loss Placement Tips
- Place stop loss beyond key support/resistance levels
- Use ATR (Average True Range) to set volatility-based stops
- Never move stop loss further from entry to avoid a loss
- Consider spread and slippage when setting tight stops
Frequently Asked Questions
What is a good risk reward ratio?
Most professional traders use a minimum of 1:2. Higher ratios like 1:3 allow profitability even with win rates below 50%.
How much should I risk per trade?
Conservative traders risk 0.5–1% per trade. Aggressive traders may risk up to 2–3%. Never exceed 5% on a single trade.
Does this calculator work for forex, crypto and stocks?
Yes. Select your asset type and the calculator adjusts position sizing units accordingly for forex lots, crypto coins, or stock shares.