Risk-to-Reward & Expected Value (EV) Calculator
Determine Trade Profitability, R:R Ratio, and Mathematical Expectancy
Formula & Mathematical Definition
Expected return per dollar risked based on win probability and reward-to-risk ratio.
Step-by-Step Calculation Guide
Subtract stop-loss price from entry price.
Subtract entry price from take-profit price.
Divide Reward by Risk.
Compute probability-weighted payoff.
Frequently Asked Questions
What is a positive Expected Value (EV)?
A positive EV indicates that over a large sample of executions, the strategy generates net profit. Even a setup with a 35% win rate has high positive EV if the reward-to-risk ratio is 3:1 or higher.
What is considered a good Risk-to-Reward (R:R) ratio?
A minimum R:R ratio of 1:2 or 1:3 is standard in quantitative swing trading. Higher R:R setups allow traders to remain consistently profitable even with win rates below 40%.
How does win rate interact with the Risk-to-Reward ratio?
The required win rate to break even is calculated as 1 / (1 + RR). For an R:R of 1:2, the breakeven win rate is 33.3%. For an R:R of 1:3, the breakeven win rate is only 25%.
Why do many high-win-rate strategies fail in live trading?
High win rate strategies (e.g. 85%) often suffer from negative asymmetrical R:R (e.g. risking $500 to make $50). A single outlier loss can wipe out dozens of previous gains.
How do algorithmic execution bots optimize Risk-to-Reward in real time?
Trading algorithms dynamically adjust limit order take-profit levels based on opposing order book liquidity pools and historical ATR targets to ensure minimum positive EV thresholds.