To use the Risk/Reward calculator, click on "calc" at the top of the screen. Next, slide the cursor down to the "Risk Reward …" and select it with a left mouse click. The calculator appears immediately.
The user will input the portfolio size (in dollars). Ten tab down to Risk %. The default is 2%. This can be modified by the user to best match your tolerance. Next input the Entry price, Stop price and Target exit price. Once all of these fields have data in them the "calculate" button will illuminate.
Click on the "calculate" button and the results will appear.
Explanation:
| 1) | In the example above, a 2% Risk value of $25,000 is $500. This can be interpreted as the maximum % amount of your portfolio in which you are willing to risk (as a loss) in one trade. The $500 is also known as the Risk Capital. |
2) Calculate the Risk …
$4.00 X 1000 = $24,500 (Entry price)
Less $3.50 X 1000 = $22,750 (Stop price)
$500 Risk
3) The maximum number of shares are calculated based on the difference of the entry price to the stop price relative to the risk capital. Formula --- $500 / ($4.00 - $3.50 ) = 1000 shares
4) Calculate the Potential Reward …
$6.00 X 1000 = $6,000 (Target price)
Less $4.00 X 1000 = $4,000 (Entry price)
$2,000 Reward
5) Results …Your Risk / Reward Ratio is 4:1. Your reward is 4 times the size of your risk.
Note: General rule of thumb is to have a minimum of a 3:1 Risk / Reward Ratio.