Risk-reward ratio
The risk-reward ratio compares how much you stand to lose on a trade if your stop-loss is hit with how much you stand to gain if your target is reached.
Risk-reward = (Entry − Stop-loss) : (Target − Entry)
What it is
Before a trade you know three prices: where you buy, where your stop-loss is, and where you plan to take profit. The distance to the stop is your risk. The distance to the target is your reward.
If you risk ₹10 to make ₹30, the risk-reward is 1:3. Traders often say the trade has “3R” of potential, meaning three times the amount risked.
How it links to win rate
Risk-reward on its own means little. It matters together with how often your trades work. With a 1:3 ratio, you can be right only one time in three and still roughly break even. With a 1:1 ratio, you need to be right more than half the time.
Many traders look for setups with a reward at least twice the risk, so they can be profitable even if many trades fail.
Limits
The target must be realistic. Putting a target far away, beyond strong resistance, makes the ratio look great on paper but rarely gets hit. A good ratio built on a fantasy target is worse than a modest one built on real levels.
Risk-reward also assumes your stop actually fills near its price. Gaps and lower circuits can make the real loss larger.
Working out a trade’s ratio
You plan to buy at ₹150 with a stop-loss at ₹144 and a target at ₹168, just below the next resistance. Risk = ₹6 per share. Reward = ₹18 per share. Risk-reward = 6:18, or 1:3. If you buy 200 shares, you risk ₹1,200 to aim for ₹3,600.
Common mistakes
- Setting unrealistic targets just to make the ratio look good.
- Taking trades where the risk is bigger than the reward without a very high win rate.
- Moving the stop further away after entry, which quietly worsens the ratio.
Entry is ₹400, stop-loss ₹390 and target ₹420. What is the risk-reward ratio?
- 1:2
- 2:1
- 1:4
Show the answer
1:2. Risk is ₹400 − ₹390 = ₹10. Reward is ₹420 − ₹400 = ₹20. So the ratio is 10:20, or 1:2.
Common questions
What is a good risk-reward ratio?
Many traders look for at least 1:2, but what counts as good depends on your win rate. A lower ratio can work if your setups succeed often.
How do I calculate risk-reward?
Subtract the stop-loss from the entry to get risk, subtract the entry from the target to get reward, and compare the two.
Is 1:1 risk-reward bad?
Not by itself, but you then need to win more than half your trades, after costs, to make money. Higher ratios give you more room for mistakes.
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