In this article
Before entering any trade, experienced traders ask two questions: How much can I lose? and How much can I make? The relationship between those two numbers is the risk-reward ratio — one of the simplest and most useful tools in trading.
This article is for education only and is not investment advice. Trading involves risk of loss.
How to calculate it
For a long (buy) trade:
Risk = Entry − Stop-loss
Reward = Target − Entry
Risk : Reward = 1 : (Reward ÷ Risk)
Example: buy at ₹500, stop-loss ₹480, target ₹550.
Risk = ₹20 per share. Reward = ₹50 per share.
Ratio = 50 ÷ 20 → 1 : 2.5.
With 100 shares: risking ₹2,000 to make ₹5,000.
For a short trade, flip the calculation: risk is stop-loss minus entry, and reward is entry minus target.
The win rate you need
The higher the reward relative to risk, the fewer trades you need to win:
Breakeven win rate = 1 ÷ (1 + Reward ÷ Risk)
| Risk : Reward | Win rate needed to break even |
|---|---|
| 1 : 1 | 50% |
| 1 : 1.5 | 40% |
| 1 : 2 | 33.3% |
| 1 : 2.5 | 28.6% |
| 1 : 3 | 25% |
(Before brokerage, taxes and slippage.)
Putting it together: expectancy
Imagine 10 trades, each risking ₹1,000 (call it 1R) with a 1:2 ratio, and you win 4 of them:
- 4 wins × 2R = +8R
- 6 losses × 1R = −6R
- Net: +2R = +₹2,000
You were wrong 60% of the time and still made money. With a 1:1 ratio and the same 40% win rate, you’d have lost 2R instead.
Risk-reward and win rate must be considered together. A great ratio with targets that are almost never reached is worse than a modest ratio that works consistently.
Setting sensible stops and targets
- Stop-loss: place it where your trade idea is clearly proven wrong — below support, a recent swing low, or a key moving average — not at an arbitrary number.
- Target: base it on the chart — the next resistance level, a previous high, or a measured move — not on how much you’d like to make.
- Then check the ratio. If it’s below about 1:1.5, many traders skip the trade and wait for a better setup.
Common mistakes
- Choosing the target first and squeezing the stop-loss to make the ratio look good.
- Moving the stop-loss further away when the price approaches it.
- Taking profits early on winners while letting losers run — which destroys the ratio in practice.
- Ignoring charges on small intraday moves.
Plan your trade
Our Risk Reward Calculator takes your entry, stop-loss, target and quantity, then shows the ratio, the breakeven win rate, and your potential profit and loss in rupees. Pair it with our Position Size Calculator to decide how many shares to buy.
Free toolTry the Risk Reward Ratio CalculatorCheck whether a trade is worth taking before you enter.Frequently asked questions
Is a higher risk-reward ratio always better?
No. Very distant targets are hit less often. A realistic 1:1.5 trade that often works can beat a 1:4 trade that rarely reaches its target.
Should I move my stop-loss during a trade?
Moving it further away increases risk and breaks your plan. Moving it closer to lock in profit (a trailing stop) is a common practice.
Do charges affect the ratio?
Yes. Brokerage, taxes and slippage reduce the reward and increase the loss slightly, especially on small intraday moves.
For education only — not investment advice or a recommendation to buy or sell any security. Trading involves risk of loss. Verify charges and prices with your broker. Written by the Toolsopedia team. Spotted an error? Tell us and we’ll fix it.