Risk-reward ratio explained
The risk-reward ratio is one of the first concepts every trader hears about, and one of the most misunderstood. It compares how much you could lose on a trade against how much you’re aiming to gain. But the ratio alone doesn’t tell you whether a strategy is profitable — the win rate sitting behind it does.
How to calculate it
You need three prices: your entry, your stop-loss, and your target.
- Risk = the distance from entry to stop-loss.
- Reward = the distance from entry to target.
- Ratio = reward ÷ risk.
If you enter at ₹500, set a stop at ₹480 (₹20 risk) and a target at ₹550 (₹50 reward), your ratio is 50 ÷ 20 = 2.5 — written as 1:2.5. You’re risking one unit to make two and a half.
The number that really matters: breakeven win rate
Here’s the insight most explanations skip. A ratio only becomes meaningful when you pair it with how often you actually win. The breakeven win rate is the percentage of trades you’d need to win, at a given ratio, just to break even over many trades.
| Risk : Reward | Breakeven win rate |
|---|---|
| 1 : 1 | 50% |
| 1 : 2 | ~33% |
| 1 : 3 | 25% |
| 2 : 1 | ~67% |
This is why a 1:2 ratio is so popular: you can be wrong two times out of three and still avoid losing money. A 2:1 ratio, by contrast, demands you win two-thirds of the time just to stay even — a much harder bar.
Putting it together
A useful trade plan needs two things to line up: a ratio that pays you well when you’re right, and a realistic win rate that clears the breakeven bar that ratio sets. A beautiful 1:5 ratio is worthless if your setup only wins 10% of the time. A modest 1:1.5 can be excellent if you win 60%.
Don’t forget charges
One caveat: the ratio is calculated on the gross price move. Brokerage, STT, GST and other charges quietly shrink your real reward and widen your effective risk, especially on small moves. Before trusting a tight edge, check the after-cost picture in the brokerage calculator.
Educational content only, not investment advice. The risk-reward tool evaluates a plan you set; it doesn’t recommend trades. Examples are illustrative.