What is Risk-Reward Ratio?

Risk-Reward Ratio: The risk-reward ratio (R:R) compares the potential loss of a trade (risk) to its potential profit (reward), expressed as a ratio like 1:2 or 1:3.

Full Definition

The risk-reward ratio measures how much profit you stand to make relative to how much you risk losing on a single trade. A 1:2 risk-reward ratio means you risk ₹1 to potentially gain ₹2. A 1:3 ratio means you risk ₹1 to gain ₹3. Even with a 40% win rate, a trader using a consistent 1:3 R:R can be profitable because winning trades earn 3× more than losing trades cost.

Impact on Your Trading

Understanding your average risk-reward ratio is essential for long-term profitability. A trader with a 50% win rate and a 1:2 average R:R has a positive expectancy — meaning they make money over a large sample of trades even though they lose half the time.

For Indian Traders

In F&O trading on NSE, options buyers often have asymmetric risk-reward — paying a small premium (risk) for potentially large moves (reward). Understanding R:R helps options buyers avoid buying overpriced options where the reward doesn't justify the premium paid.

How to track this in your journal

Log both your planned R:R (before entry) and actual R:R (after exit) in every trade. Over time, a growing gap between planned and actual R:R reveals either premature exits or not letting winners run.

Frequently Asked Questions

What is a good risk-reward ratio for trading?▼

A minimum of 1:2 is recommended for most traders. With a 1:2 ratio, you only need a 34% win rate to break even (before brokerage). For intraday and options traders in India, targeting 1:2 to 1:3 on each trade helps offset the inevitable losing trades.

How do I calculate risk-reward ratio?▼

R:R = (Target Price − Entry Price) ÷ (Entry Price − Stop Loss Price) for long trades. For example: Entry ₹100, Target ₹106, Stop Loss ₹97. Risk = ₹3, Reward = ₹6. R:R = 6÷3 = 1:2.

Track Risk-Reward Ratio in your journal

Use Trade Prom to monitor how risk-reward ratio affects your trading results.

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Related Terms

Win Rate →
Win rate is the percentage of trades that result in a profit, calculated as (winning trades ÷ total trades) × 100.
Profit Factor →
Profit factor is the ratio of gross profit to gross loss over a set of trades. A profit factor above 1.0 means the trading strategy is profitable.
Stop Loss →
A stop loss is a pre-defined price level at which a losing trade is automatically exited to limit the maximum loss on that position.
Position Sizing →
Position sizing is the process of determining how many shares, contracts, or lots to trade on each position based on your account size and risk tolerance.