Risk-reward ratio explained
Updated 11 October 2026
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The risk-reward ratio compares how much you stand to lose on a trade with how much you hope to gain. It is set before you enter, using your entry price, your stop-loss and your target. It does not tell you whether a trade will work. It tells you what the trade has to achieve to be worth taking.
The formula
- Risk per share = entry − stop-loss (for a long trade)
- Reward per share = target − entry
- R (reward-to-risk) = reward ÷ risk
For a short trade, flip the signs: risk is stop − entry, reward is entry − target. People write the ratio in different ways, such as "1:3" or "3R". Both here mean you aim to make three rupees for every one rupee you risk.
Worked example
You plan to buy Stock ABC at ₹500 with a stop at ₹490 and a target at ₹530.
- Risk per share = ₹500 − ₹490 = ₹10
- Reward per share = ₹530 − ₹500 = ₹30
- R = 30 ÷ 10 = 3, or 1:3
If you buy 200 shares, you risk 200 × ₹10 = ₹2,000 to try for 200 × ₹30 = ₹6,000. The risk-reward calculator does this for any prices.
Break-even win rate
A higher R lets you be wrong more often and still break even. The formula is simple:
Break-even win rate = 1 ÷ (1 + R)
For R = 3, that is 1 ÷ 4 = 25%. Over many trades, if you win 25% of the time and every win is three times every loss, you end at zero before costs. Check: in 100 trades, 25 wins × ₹6,000 = ₹1,50,000, and 75 losses × ₹2,000 = ₹1,50,000. They cancel exactly.
| R (reward ÷ risk) | Break-even win rate |
|---|---|
| 0.5 | 66.7% |
| 1 | 50% |
| 1.5 | 40% |
| 2 | 33.3% |
| 3 | 25% |
Why a high R is not automatically better
It is tempting to set far targets so the ratio looks good. The catch is that a far target is reached less often. A 1:5 trade only needs a 16.7% win rate to break even, but if the target is unrealistic you may hit it even less than that. R and win rate pull against each other, and only your own honest records show where you stand.
The other catch is that a stop is not always filled at your price. Gaps and fast markets can turn a planned ₹10 loss into ₹25. If that happens often, your real R is lower than your planned R.
Costs move the break-even point
Brokerage, STT, exchange charges, GST and stamp duty are paid on wins and losses alike. Suppose costs are ₹200 per round trip on the trade above. A win now nets ₹6,000 − ₹200 = ₹5,800, and a loss costs ₹2,000 + ₹200 = ₹2,200. The effective R becomes 5,800 ÷ 2,200 ≈ 2.64, and the break-even win rate rises to 1 ÷ 3.64 ≈ 27.5%. For small, frequent trades costs can wipe out an edge entirely. See trading charges explained or estimate them with the brokerage calculator.
Expectancy: putting R and win rate together
Expectancy is the average result per trade over many trades:
Expectancy = (win rate × average win) − (loss rate × average loss)
As a purely hypothetical illustration, take 1:2 trades risking ₹1,000. If 30% win, expectancy = 0.30 × ₹2,000 − 0.70 × ₹1,000 = ₹600 − ₹700 = −₹100 per trade, before costs. The ratio looked fine, but the win rate was below the 33.3% break-even. This is why R alone says little; it needs a win rate you actually achieve.
Using the ratio sensibly
- Set the stop where the trade idea is clearly wrong, not where it gives a pretty ratio.
- Set the target from something you can explain, not from the ratio you want.
- Decide position size after you know the risk per share. The position sizing guide shows how.
- Keep a log of planned R, actual R and outcome. Your log is the only reliable source of your own win rate.
Risk reminder
A good ratio is not a promise of profit. SEBI's studies (2023 and 2025) found about 9 in 10 individual F&O traders lost money in the years studied (SEBI). Use the ratio to understand what a trade needs, and keep each loss small enough to live with.
Questions people ask
- What is a good risk-reward ratio?
- There is no single good number. A ratio only makes sense alongside the win rate you actually achieve and your trading costs.
- How do I calculate the break-even win rate?
- Divide 1 by (1 + R), where R is reward divided by risk. For R = 2 that is 1 ÷ 3, or about 33.3%.
- Do trading costs change the ratio?
- Yes. Costs reduce every win and add to every loss, which lowers the effective ratio and raises the break-even win rate.
- Is 1:1 risk-reward bad?
- Not necessarily. At 1:1 you need to win more than 50% of the time after costs to come out ahead, which is hard but depends on the setup.