Risk Reward Ratio in Trading: How to Calculate It and Why 1:2 Matters

If there’s one number that sorts the traders who last from the ones who don’t, it’s the risk reward ratio in trading. It puts what you could lose on a trade, the gap between entry and stop loss, next to what you’re aiming to make, the gap between entry and target. Risk ₹10 to make ₹20 and your risk-reward is 1:2. Get comfortable with this ratio and something clicks: you don’t have to win most of your trades to make money. You just need the winners to be bigger than the losers.

Below we work through how to calculate it, why 1:2 has become the usual benchmark, how it ties in with your win rate, and how to actually use it when you trade Indian stocks.

What is the risk reward ratio in trading?

It’s the potential loss on a trade measured against the potential profit:

• Risk = Entry price − Stop loss (for a long trade)
• Reward = Target price − Entry price
• Risk : Reward = Risk ÷ Risk : Reward ÷ Risk

Going short? Flip the subtraction. Risk becomes stop minus entry, and reward becomes entry minus target.

Worked example

Say you want to buy a stock at ₹500 (the numbers are illustrative):

• Stop loss: ₹485, so you’re risking ₹15 per share
• Target: ₹545, so the reward is ₹45 per share
• Risk-reward = 15 : 45 = 1:3

Every rupee at risk is chasing three. Buy 100 shares and you’re putting ₹1,500 on the line to make ₹4,500, before costs.

Why the risk reward ratio matters: the win-rate link

On its own, risk-reward is only half the picture. The other half is your win rate, meaning the share of trades that hit the target before the stop. You need both to know whether a strategy makes money.

Ignoring costs, the win rate you need just to break even at a given risk-reward is:

Breakeven win rate = 1 ÷ (1 + Reward/Risk)

• At 1:1, you have to win 50% of trades to break even.
• At 1:2, roughly 33% will do.
• At 1:3, 25% is enough.
• At 1:0.5 (risking ₹2 to make ₹1), you need to win about 67%.

That’s the reason so many traders insist on at least 1:2. You can be wrong on two trades out of three and still roughly break even, and anything better than one hit in three is profit.

A high win rate with a poor risk-reward is fragile. One large loss can wipe out a dozen small wins. A modest win rate with a good risk-reward is far more robust.

A 10-trade illustration

Picture 10 trades, with ₹1,000 at risk on each:

• Strategy A (1:1, 60% win rate): 6 wins × ₹1,000 − 4 losses × ₹1,000 = +₹2,000
• Strategy B (1:3, 35% win rate): 3.5 wins × ₹3,000 − 6.5 losses × ₹1,000 = +₹4,000
• Strategy C (1:0.5, 60% win rate): 6 wins × ₹500 − 4 losses × ₹1,000 = −₹1,000

Look at C. It wins more often than B and still ends up in the red. That’s what happens when you cut winners early and let losers run, and it’s a very common trap.

Going one step further: expectancy

Put risk-reward and win rate together and you get expectancy: the average you can expect to make or lose per trade across a lot of trades.

Expectancy = (Win rate × Average win) − (Loss rate × Average loss)

For Strategy B: (0.35 × ₹3,000) − (0.65 × ₹1,000) = ₹1,050 − ₹650 = ₹400 per trade. Strategy C comes out at (0.60 × ₹500) − (0.40 × ₹1,000) = ₹300 − ₹400 = −₹100 per trade. With positive expectancy, the strategy should make money over a big enough sample. With negative expectancy, it will lose money no matter how disciplined you are.

The only honest way to know your own expectancy is a trading journal. Note down the entry, stop, target, exit and why you took each trade. After 30 to 50 trades you’ll have a realistic read on your real win rate and your average win and loss, and these are often well off what traders assume. Plenty of people discover their average loss is bigger than planned because they kept moving stops, or that their average win is smaller because they bailed early. The journal tells you which habit to fix first.

Expectancy is also why consistency counts for more than any single trade. Even a strategy with ₹400 of positive expectancy will have losing streaks. At a 35% win rate, five or six losses in a row is perfectly normal. Traders who drop a sound plan in the middle of an ordinary losing run never get to collect the edge. Keeping position sizes small enough to sit through those streaks is what gives the maths time to work.

Why most traders get this wrong

Numbers on Indian derivatives traders show just how expensive weak risk control can get. A SEBI study found that 93% of individual traders in equity F&O lost money between FY22 and FY24, with aggregate losses above ₹1.8 lakh crore over those three years. Plenty of things feed into that, costs and leverage among them, but one behaviour shows up again and again: grabbing profits quickly while sitting on losing trades and hoping they come back. That habit produces exactly the lopsided profile of Strategy C.

How to use risk-reward in a real trade plan

1. Find the stop first. Place it where the trade idea is proven wrong, say below support or under the low of a breakout candle, not at some arbitrary percentage. Our guide to stop loss in trading covers this.
2. Find a logical target. The next resistance level, a measured move from a pattern or a previous swing high all work. See how to find support and resistance.
3. Calculate the ratio. If the reward isn’t at least about twice the risk, pass, or wait for an entry closer to the stop.
4. Size the position. Decide how much capital you’re willing to risk (many traders use 1–2% per trade) and divide that by the risk per share. The position sizing formula explains the steps.
5. Stick to the plan. No widening the stop once you’re in, and no grabbing the first small profit unless the plan says so.

Improving your risk-reward

• Enter closer to the stop. Buying a pullback to support rather than chasing a move gives you a tighter stop with the same target, so the ratio gets better.
• Use partial exits. Book some of the position at the first target and trail the stop on the rest to ride a longer move.
• Trade with the trend. Moves in the direction of the bigger trend usually go further, which makes larger targets realistic.
• Avoid trades into resistance. If heavy resistance sits just above your entry, the realistic reward is small, whatever your target says.

Where the ratio falls short

It helps you plan. It doesn’t promise anything:

• Targets can be unrealistic. A 1:5 target looks great on paper, but if price rarely moves that far, your win rate falls apart. Build targets from chart structure, not hope.
• Gaps break stops. Overnight news can open a stock well past your stop, so the real loss ends up bigger than planned. The risk is higher around results and in F&O.
• Costs matter. Brokerage, STT, exchange charges and slippage eat into the reward and add to the risk, especially when intraday targets are small.
• Probability is not fixed. A wide stop lifts the win rate but drags the ratio down. A tight stop does the reverse. You’re always trading one off against the other.

Risk-reward is the one part of trading you fully control. You can’t control where price goes, but you can always decide how much you’re willing to lose to find out.

Risk-reward for intraday vs swing trades

Intraday traders deal in smaller moves, so costs take a bigger bite of the reward. A 1:2 setup with a ₹2 stop and a ₹4 target can shrink a lot once charges come off. Check your ratio net of costs and steer clear of very tight targets. Our intraday trading rules for beginners go into more detail.

Swing traders hold for days or weeks and can go after bigger moves, so 1:2 or 1:3 is easier to reach. The flip side is overnight gap risk, which means position size should leave room for a gap past the stop. See our swing trading strategies for beginners.

A quick checklist before every trade

1. Where is my stop, and why there?
2. Where is my target, and does it come from chart structure?
3. Is the reward at least about twice the risk after costs?
4. How many shares keep my loss within 1–2% of capital?
5. Will I actually honour the stop if it’s hit?

Bottom line

The risk reward ratio in trading swaps guesswork for arithmetic. Pair it with an honest estimate of your win rate and it tells you whether a strategy can make money before a single rupee is at stake. Look for setups where the reward is at least twice the risk, put stops where the idea is wrong, size every trade so a loss won’t hurt you badly, and give winners room to reach their targets. For the full framework, read our pillar guide to risk management in trading.

This article is for education only and is not investment advice.