Risk-Reward Ratio

The risk-reward ratio compares the amount you stand to lose on a trade to the amount you stand to gain. It is one of the most fundamental concepts in trading discipline. A risk-reward ratio of 1:3 means you risk INR 1 to potentially make INR 3 — widely considered a favourable setup.

To calculate risk-reward, you need three prices: your entry, your Stop Loss (defining maximum loss), and your target (defining expected profit). If you buy a stock at INR 500 with a stop loss at INR 480 and a target of INR 560, your risk is INR 20 and your reward is INR 60, giving a ratio of 1:3.

The mathematical significance is profound. With a 1:3 risk-reward ratio, you can be wrong on 70% of your trades and still be profitable overall. If you take 10 trades risking INR 1,000 each, lose 7 (total loss INR 7,000) and win 3 (total gain INR 9,000), your net profit is INR 2,000. This is why professional traders obsess over risk-reward rather than win rate.

In Indian market practice, successful swing traders typically look for setups with a minimum 1:2 risk-reward ratio. Intraday traders on NSE stocks might accept 1:1.5 because of higher win rates on shorter timeframes. The key is consistency — applying the same risk-reward framework to every trade and never moving your stop loss further away to accommodate a losing position.

Risk-reward ratios should be calculated before entering a trade, not after. This requires clear identification of Support and Resistance levels, logical stop loss placement (not arbitrary), and realistic profit targets based on chart structure. Many traders use the risk-reward ratio as a final filter — even if all other conditions are met, they skip the trade if the risk-reward is inadequate.