The risk-reward ratio compares how much you can lose on a trade with how much you can realistically gain. It is one of the simplest numbers in trading — and one of the most powerful, because it determines the win rate you need to be profitable.
How to calculate it
- Risk = entry − stop-loss (for a long).
- Reward = target − entry.
- Reward-to-risk = reward ÷ risk.
Example: entry ₹200, stop ₹190 (risk ₹10), target ₹225 (reward ₹25) → reward-to-risk 2.5:1.
Use the risk-reward calculator to work it out instantly.
Risk-reward and win rate
The higher your reward-to-risk, the lower the win rate you need to break even:
| Reward : Risk | Break-even win rate |
|---|---|
| 1 : 1 | 50% |
| 1.5 : 1 | 40% |
| 2 : 1 | 33.3% |
| 3 : 1 | 25% |
| 0.5 : 1 | 66.7% |
(Before costs. Costs push the break-even rate slightly higher.)
This is why many professional trend traders win only 35–45% of their trades and still make money: their winners are two to three times larger than their losers.
Expectancy: the number that really matters
Expectancy per trade = (win rate × average win) − (loss rate × average loss).
Example in R (multiples of risk): win rate 45%, average win 2R, average loss 1R → 0.45 × 2 − 0.55 × 1 = +0.35R per trade. Over 100 trades risking ₹2,000 each, that is about ₹70,000 before costs.
Test what different combinations do over hundreds of trades with the Monte Carlo simulator.
Choosing realistic targets
A 5:1 reward-to-risk looks great on paper, but if the target is beyond a strong resistance level, it may rarely be reached. Realistic targets come from:
- the next support/resistance zone,
- measured moves from patterns (chart patterns guide),
- Fibonacci extensions (Fibonacci retracement),
- ATR multiples for trailing exits.
If the nearest opposing level gives less than about 1.5:1, consider skipping the trade.
Risk-reward is not everything
A high reward-to-risk with a very low probability of reaching the target is not better than a modest ratio with high probability. Strategy statistics — measured in a trading journal or backtest — tell you which combination works for your method.
Managing trades to improve risk-reward
- Partial profits: take some profit at 1.5R and trail the rest.
- Move stop to break-even after a certain gain — but not too early, or you will be stopped by noise.
- Trailing stops capture larger trends than fixed targets.
Common mistakes
- Setting targets first and stops wherever they fit.
- Moving stops wider to "improve" the ratio — it does the opposite.
- Ignoring costs on small targets, especially intraday (brokerage calculator).
- Cutting winners early while letting losers run — the most common way traders destroy their own risk-reward.
Key takeaways
- Reward-to-risk = (target − entry) ÷ (entry − stop).
- Higher ratios lower the win rate you need to profit.
- Expectancy (win rate × avg win − loss rate × avg loss) is the real measure of edge.
- Use realistic, level-based targets and protect winners with trailing stops.
Frequently asked questions
What is a good risk-reward ratio?
Many traders look for at least 1.5:1 or 2:1. The right number depends on your strategy's win rate.
Can a strategy with a low win rate be profitable?
Yes. With a 2:1 reward-to-risk, a win rate above about 34% (plus costs) can be profitable.
Should I always aim for 3:1?
Not if the market structure does not allow it. Unrealistic targets reduce your win rate too much.
How do I calculate risk-reward quickly?
Use our free risk-reward calculator.
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