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I'm learning how to do a Risk/Reward ratio and want to make sure I am calculating this correctly.

Let's start with a .92 per share of 500 shares purchase = $460.

I expect the stock to increase by .08 so I multiply this by 500 shares = $40.

$40/500 = .08:1 if I let my investment run down to $0


I set a stop-loss of .88 per share X 500 shares = $440. Now I take total stop loss and divide by the profit.

$440/40 = 11

This means a risk/reward of 11:1

Is this correct?

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If you plan to take profit at $1.00 then your profit will be $40.

Then, if you set your stop at $0.88 then your loss if you get stopped will be $20.

So your Reward : Risk = 2:1.

Note, that this does not take into account brokerage in and out and any slippage from the price gapping past your stop loss.

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  • Yes, I fixed my type thanks. So the final calculation is $40/$20= 2 to arrive at the 2:1 ratio? Jan 4, 2017 at 11:16
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    Yes the potential profit is twice the potential risk.
    – Victor
    Jan 4, 2017 at 11:18

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