What is Risk-Reward Ratio in Trading?
The risk-reward ratio (R:R) compares the potential loss of a trade to its potential profit. It's one of the most important metrics professional traders use to evaluate whether a trade is worth taking.
A risk-reward ratio of 1:3 means you're risking ₹1 to potentially make ₹3. Even if you only win 40% of your trades, you can still be profitable with a good R:R ratio.
💡 The Golden Rule
Most professional traders avoid taking trades with a risk-reward ratio less than 1:2. This means they only enter trades where the potential reward is at least twice the potential risk.
How to Calculate Risk-Reward Ratio
R:R Formula:
R:R = (Take Profit - Entry) ÷ (Entry - Stop Loss)
Step-by-Step Example (Long Trade):
- Entry Price: ₹25,000
- Stop Loss: ₹24,500 (₹500 risk)
- Take Profit: ₹26,500 (₹1,500 reward)
- Risk-Reward Ratio: ₹1,500 ÷ ₹500 = 1:3
- ✓ This is an excellent trade setup!
Why Risk-Reward Ratio Matters
📈 Win Rate vs R:R
With 1:3 R:R, you only need to win 25% of trades to break even:
| R:R | Break-Even Win Rate |
|---|---|
| 1:1 | 50% |
| 1:2 | 33% |
| 1:3 | 25% |
| 1:4 | 20% |
💰 Profit Simulation
10 trades with 1:2 R:R, 40% win rate:
- 4 wins × ₹2,000 = ₹8,000
- 6 losses × ₹1,000 = ₹6,000
- Net Profit: ₹2,000 ✓
Trading Styles and Optimal R:R Ratios
Scalping (1:1 to 1:1.5)
Quick trades with tight stops. Requires high win rate (60%+) to be profitable.
Day Trading (1:2 to 1:3)
Balanced approach. Most common among profitable retail traders.
Swing Trading (1:3 to 1:5)
Larger moves over days/weeks. Can afford lower win rate with bigger rewards.
Common Mistakes When Using R:R
Unrealistic targets
Setting a 1:10 R:R but the target never gets hit. Base targets on market structure, not wishful thinking.
Moving stop loss
Widening your stop "just in case" destroys your R:R and risk management.
Taking profit too early
Closing at 1:1 when you planned for 1:3 ruins your edge over time.
Frequently Asked Questions
What is a good risk-reward ratio for beginners?
Start with a minimum of 1:2 R:R. This means you need to win only 33% of trades to break even. As you develop your edge, you can adjust based on your actual win rate.
Should I always aim for 1:3 or higher?
Not necessarily. The optimal R:R depends on your strategy's win rate. A scalper with 70% win rate can be profitable at 1:1. Focus on what works for your trading style. The goal is positive expectancy.
How do I improve my risk-reward ratio?
1) Enter trades closer to support/resistance for tighter stops. 2) Use multiple take profit levels. 3) Trail your stop loss as the trade moves in your favor. 4) Be patient and wait for high-probability setups.
What's the relationship between R:R and position sizing?
They work together! R:R tells you if the trade is worth taking, while position sizing (based on your stop loss) tells you how much to risk. Use our Position Size Calculator alongside this tool.