12.4What is the risk-reward ratio?
1What is it?
The risk-reward ratio compares how much you could lose (to your stop) with how much you could gain (to your target).
2Why does it exist?
With good risk-reward, you can be wrong more often than right and still make money.
3Diagram
Risk (to stop)
₹-20
Reward (to target)
₹60
4Calculation
R:R = (Target − Entry) ÷ (Entry − Stop)
- Entry ₹500, stop ₹480 (risk ₹20), target ₹560 (reward ₹60).
- R:R = 60 ÷ 20 = 3 → 1:3.
- 10 trades, win only 4: 4 × ₹60 − 6 × ₹20 = ₹240 − ₹120 = +₹120 per share.
Even with a 40% win rate, a 1:3 ratio is profitable (before costs).
5Quick revision
- Reward ÷ risk.
- Aim for at least 1:2.
- Lets you profit with a lower win rate.
6Knowledge check
Q1. Risk ₹10, reward ₹25. R:R?Show answer
1:2.5.
Q2. With 1:1 R:R, what win rate breaks even (before costs)?Show answer
50%.
Q3. With 1:3, breakeven win rate?Show answer
25%.