Risk-reward ratio explained
What the risk-reward ratio means, why it must be read with your win rate, and how charges move the breakeven point.
How to calculate it
You need three prices: entry, stop-loss and target.
Reward = Target − Entry
Risk : reward = 1 : (Reward ÷ Risk)
Enter at ₹500 with a stop at ₹480 and a target at ₹550: risk ₹20, reward ₹50, so the ratio is 1 : 2.5.
The breakeven win rate
The ratio means little without knowing how often you win. The breakeven win rate is the share of trades that must reach the target for wins and losses to cancel out:
At 1 : 2.5 that is 20 ÷ 70 = 28.6%. At 1 : 1 it is 50%.
| Risk : reward | Breakeven win rate | Wins needed out of 10 trades |
|---|---|---|
| 1 : 0.5 | 66.7% | 7 |
| 1 : 1 | 50.0% | 5 |
| 1 : 1.5 | 40.0% | 4 |
| 1 : 2 | 33.3% | 4 |
| 1 : 3 | 25.0% | 3 |
The last column rounds up, because winning exactly at the breakeven rate only returns you to zero before charges.
Expectancy
Expectancy combines the ratio and the win rate into the average result per trade:
With a 40% win rate, an average win of ₹2,500 and an average loss of ₹1,000: 0.4 × 2,500 − 0.6 × 1,000 = ₹400 per trade. With a 25% win rate the same numbers give −₹125 per trade.
Adding charges
Charges reduce every win and increase every loss. On a ₹1 lakh intraday trade they are about ₹83 per round trip, so a ₹1,000 risk becomes about ₹1,083 and a ₹2,500 reward about ₹2,417, and the breakeven win rate rises from 28.6% to about 30.9%. Check your costs in the brokerage calculator.
Losing streaks
Even a positive-expectancy strategy has long runs of losses. With a 35% win rate, the chance that any given run of 10 trades contains no winners is about 1.3%, so over a few hundred trades a streak of 10 losses is likely to happen at some point. Keeping risk per trade small, as in the position sizing guide, is what lets you survive those runs.
Mistakes to avoid
- Choosing a distant target just to show a high ratio.
- Widening the stop after entry.
- Judging a strategy on a handful of trades rather than a large sample.
Work out any trade in the risk-reward calculator.
Frequently asked questions
What is the risk-reward ratio in trading?
It compares the amount you could lose (entry to stop-loss) with the amount you could gain (entry to target). 1:2 means risking ₹1 to make ₹2.
What win rate do I need with a 1:2 ratio?
At least 33.3% to break even before charges, calculated as 1 ÷ (1 + 2).
Is a higher risk-reward ratio always better?
No. Distant targets are hit less often. What matters is expectancy: the ratio together with the real win rate.
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Written and maintained by Mantu Kumar
Mantu builds TradeProfy’s calculators and checks every statutory rate against exchange circulars, broker rate cards and the Finance Act. He is not a SEBI-registered adviser, so TradeProfy explains costs and maths but never tells you what to trade.
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