# Reward to Risk Calculation

Calculate Risk/Reward by dividing profit (reward) by your maximum risk. You may notice the equation of often written incorrectly as I did here. Investors often speak of Risk/Reward to Risk to Reward, but they actually mean the opposite: Reward to Risk or Reward/Risk. It’s the same as Profit/Loss or P&L. What we really mean is how much Reward is achieved for the Risk taken, so it’s Reward/Risk.

Reward to Risk Ratio

If we risk \$1 to earn \$2, that’s a Reward/Risk or Reward to Risk ratio of 2:1. The Reward was twice as much as the risk. This could be used in different ways to illustrate Reward to Risk.

• Before an investment position is entered we can Calculate the Reward to Risk potential.
• If we enter a position at \$50 per share and expect it could trend to \$60, that’s a \$10 increase or 20%.  That may not seem like a lot and it isn’t if you are risking all of the investment. But, if you limit the loss to \$5 and predetermine that we’ll exit at \$45, then the Reward to Risk is much more of an edge.
• After an investment position is closed (sold) we can Calculate the Risk to Reward achieved.If we entered a position at \$50 per share and it trended to \$60 and we sold it, that’s a \$10 increase or 20% realized profit. A gain is not realized as a profit until it is sold. Simply being “up” in a position doesn’t mean you really have a profit.

Asymmetric Payoff

Asymmetric Investing

Asymmetric Risk