1. What is a Risk-Reward Ratio Calculator?

Definition: This calculator determines the risk-reward ratio of an investment or trading strategy based on win probability, loss probability, potential gain, and potential loss.

Purpose: It helps investors and traders evaluate whether a potential investment or trade offers favorable risk-reward characteristics.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( RR \) — Risk-reward ratio (dimensionless)
• \( P_{win} \) — Probability of win (0-1)
• \( G \) — Gain (currency, e.g., USD)
• \( P_{loss} \) — Probability of loss (0-1)
• \( L \) — Loss (currency, e.g., USD)

Explanation: The formula compares the expected value of wins to the expected value of losses. A ratio greater than 1 indicates a potentially favorable opportunity.

3. Importance of Risk-Reward Ratio

Details: Proper risk-reward analysis helps maintain profitable trading strategies even with win rates below 50% by ensuring gains outweigh losses.

4. Using the Calculator

Tips: Enter win probability (0-1), gain amount, loss probability (0-1), and loss amount. Note: P_win + P_loss should typically equal 1.

5. Frequently Asked Questions (FAQ)

Q1: What's a good risk-reward ratio?
A: Generally, ratios above 1.5 are considered good, but this depends on your win rate and strategy.

Q2: How are probabilities determined?
A: Based on historical performance or statistical analysis of similar trades/investments.

Q3: Should P_win + P_loss equal 1?
A: Typically yes, but the calculator allows for other scenarios where probabilities don't sum to 1.

Q4: How does this relate to expected value?
A: Expected value = (P_win × G) - (P_loss × L). A positive EV with good RR ratio is ideal.

Q5: Can I use this for non-trading scenarios?
A: Yes, it applies to any decision with probabilistic outcomes and quantifiable gains/losses.