Risk Reward Break Even Calculator

Understanding risk reward is essential for traders and investors to make informed decisions. This calculator helps you determine break even points, risk reward ratios, and potential profits based on your trade setup.

What is Risk Reward?

Risk reward refers to the relationship between the potential loss and potential gain of a trade or investment. Traders use this concept to evaluate the profitability of their positions and manage risk effectively.

Key terms:

Entry price - The price at which you enter the trade
Stop loss - The price level where you exit to limit losses
Take profit - The price level where you exit to secure gains
Risk per trade - The maximum amount you're willing to lose per trade

The risk reward ratio is calculated by dividing the potential reward by the potential risk. A good ratio is typically 1:2 or better, meaning you risk $1 to gain $2 or more.

How to Calculate Break Even

The break even point is the price at which your profits equal your losses. To calculate it:

Break Even Price = Entry Price + (Stop Loss - Entry Price) × (Risk Reward Ratio)

For example, if you enter a trade at $50, set a stop loss at $48, and want a 1:2 risk reward ratio, your break even would be:

Example Calculation

Entry Price = $50
Stop Loss = $48
Risk Reward Ratio = 1:2

Break Even Price = $50 + ($48 - $50) × 2 = $54

This means you need to reach $54 to start making a profit after covering your initial loss.

Risk Reward Ratio

The risk reward ratio measures the potential profit relative to the potential loss. It's calculated as:

Risk Reward Ratio = (Take Profit - Entry Price) / (Entry Price - Stop Loss)

A ratio of 1:1 means you risk $1 to gain $1. A ratio of 1:2 means you risk $1 to gain $2. Traders typically aim for ratios of 1:2 or better.

Common risk reward ratios:

1:1 - Break even
1:2 - Good trade
1:3 - Excellent trade
Below 1:1 - Unfavorable trade

Practical Example

Let's say you're trading a stock with these parameters:

Entry Price: $45
Stop Loss: $42 (3% risk)
Take Profit: $50 (11.1% reward)

Calculations:

Risk Reward Ratio = ($50 - $45) / ($45 - $42) = 5 / 3 ≈ 1.67:1

Break Even Price = $45 + ($42 - $45) × 1.67 = $45 - 5.01 = $39.99

This means:

You have a favorable 1.67:1 risk reward ratio
Your break even point is $39.99
You need to reach $50 to achieve your target profit

Remember: The risk reward ratio only tells part of the story. You should also consider:

Market volatility
Liquidity at your entry/exit points
Time horizon and position size
Psychological factors

FAQ

What is a good risk reward ratio?

A good risk reward ratio is typically 1:2 or better. This means you risk $1 to gain $2 or more. Ratios below 1:1 are generally considered unfavorable.

How do I calculate my break even point?

Use the formula: Break Even Price = Entry Price + (Stop Loss - Entry Price) × Risk Reward Ratio. This gives you the price level where your profits equal your losses.

What if my trade doesn't reach my take profit?

If your trade doesn't reach your take profit, you'll exit at your stop loss, resulting in a loss equal to your risk per trade. This is why it's important to set realistic stop losses and take profits.

Can I use this calculator for options trading?

Yes, you can adapt this calculator for options trading by using the strike price as your entry point and considering the premium paid as part of your risk calculation.

How does position size affect risk reward?

Position size directly affects your risk. A larger position size means a larger potential loss, while a smaller position size means a smaller potential loss. Always calculate your position size based on your risk tolerance.