Risk-Reward & Position Size Calculator
Never blow up your trading account. Calculate precise share quantities based on strict capital-at-risk percentages and asymmetrical risk-reward setups.
Trade Parameters & Account Rules
Recommended Position Size
60 Shares
Required Capital: ₹30,000
What is a Risk-Reward Ratio Calculator and Why Is it Critical?
The risk-reward ratio calculator is a position sizing tool used by active equity investors and swing traders in derivative markets to assess the monetary reward they will get against the amount of money they are risking on each trade – before initiating an order.
Modern markets reward active position traders, options traders or even long-term fundamental investors who are right more often than they are wrong. But it is not being correct on a trade that matters. It is the reward of being correct on a trade that defines the profitability of a trader.
Using an online risk reward calculator keeps an investor from booking small profits and letting their losing positions bleed. By setting a technical stop-loss price and profit target price before initiating a trade, this risk reward calculator for trade shows you if an opportunity has a positive expectancy or is a bad bet.
The Maths Behind Risk-Reward Ratio
The risk-reward ratio formula compares the difference between your entry and target price with the disparity between your entry and stop-loss price:
Where:
Entry Price: The cost at which you have initiated the trade. Long or short.
Stop-Loss Price: The price at which your trade thesis fails.
Target Price: The profit booking level or the resistance zone.
Total Position Risk: Risk per share x Number of Shares traded
How to Calculate Risk-Reward Ratio: Practical Trading Example
Take a look at this practical example wherein we use a risk to reward calculator to decide if a trade setup makes sense:
Setup: Breakout trade in Tata Motors after a period of consolidation near support.
Entry Price: ₹920 per share
Stop-Loss Price: Just below a significant swing-low support at ₹890 per share
Target Price: Overhead resistance at ₹1,010 per share
Step 1: Work Out Risk and Reward Per Share
Downside Risk per Share = ₹920 − ₹890 = ₹30 per share
Upside Reward per Share = ₹1,010 − ₹920 = ₹90 per share
Step 2: Risk-Reward Ratio Calculation
This means that for every ₹1 you risk on this position, you can expect to make ₹3 in profit. This is a 1:3 risk-reward ratio and even after accounting for brokerage, transaction costs, STT, etc. we are still in the money.
The Maths of Win % and Risk-Reward Ratio
Most novice traders assume that to be successful in intraday trading or positional trading, they need to be right on at least 8 to 9 out of every 10 trades. But what most new traders do not realise is that a decent risk-reward ratio on a trade can keep them in profit even if they are wrong on the majority of their trades:
1:1 Ratio: You need a 50.0% win rate to be barely in profit
1:2 Ratio: You just need 33.3% winning trades to break even
1:3 Ratio: A mere 25.0% win rate and you are making a profit
1:4 Ratio: 20.0% winning trades to break even on a sample of 100 trades
Using a risk-reward calculator to keep a minimum 1:2 or 1:3 risk-reward ratio means that a trader who wins only 4 out of every 10 trades will finish the month with a profit.
Tactical Rules for Setting Your Stops and Targets
A trade risk-reward calculator works only if you have realistically sized your risk and reward zones. Here are a few rules to keep in mind while using a risk to reward calculator:
1. Always Set Stops Based on Structure
Do not set your stop-loss orders at arbitrary prices. Set your stops just below a significant swing-low price, a critical exponential moving average (20 EMA / 50 EMA) or a demand order block. If the stock has moved to this zone, your entire thesis behind the trade is flawed.
2. The Never Exceed 1% to 2% Portfolio Risk Rule
Never risk more than 1% to 2% of your total portfolio on a single trade. So if your portfolio is worth ₹5,00,000, your maximum risk on any given trade should not exceed ₹5,000 to ₹10,000 – regardless of how many shares you buy.
3. Look for Asymmetrical Payoff Setups
If you are a trend follower, look for setups wherein your downside risk is limited by a clearly definable zone of support while your profit potential extends to uncharted multi-month highs or multi-year resistance levels.
Frequently Asked Questions (FAQs)
QWhat is an ideal risk-reward ratio for stock trading?
A decent risk-reward ratio in share trading is 1:2 with ideal setups offering 1:3 or more. Most active swing traders and positional investors go for a minimum 1:1 reward to risk setup. However, such a scenario is unviable due to brokerage, exchange turnover charges, STT, slippage, etc. that will erode your profitability over time.
QHow does position sizing relate to the risk-reward ratio?
The risk-reward ratio indicates the amount of reward you can expect from a trade versus the risk you are taking on it. Position sizing indicates how many shares you should buy for an order based on your risk-reward assessment. Divide your risk appetite (say ₹5,000) by the amount of risk per share (₹30 in our example) to work out the position size
QCan a high win rate compensate for a poor risk-reward ratio?
Having a high win-rate helps improve your profitability but comes with a high drawdown risk. Scalpers who target ₹0.10 profits with ₹0.50 stops have a win-rate of 85% but just one black swan trade or a trade that gets stopped out can wreck their accumulated profits. A positive risk-reward setup helps one stay away from such career-ending situations.
QShould I adjust my stop-loss after the stock has moved in my favour?
Yes. As your trade moves in your favour and approaches your target price, you should trail the stop-loss to your entry price (break-even point) or behind a higher low to lock in some of your profits and minimise your risk on the position.