What Is Risk-Reward Ratio in Trading?
Risk-reward ratio (R:R) compares the size of your average winning trade to the size of your average losing trade, usually expressed as a ratio like 2:1. For a single planned trade, it compares the distance to your target against the distance to your stop-loss — telling you how much you stand to gain for every rupee you risk, independent of how often you win.
Formula
Risk-Reward Ratio = Average Win Size ÷ Average Loss SizeWorked example
A trader buys the NIFTY 24800 Call Option at ₹150, places a stop-loss at ₹100 (risking ₹50 per unit), and sets a target of ₹250 (aiming for ₹100 per unit). On a 75-unit lot, that is ₹3,750 of risk against ₹7,500 of potential reward — a 2:1 risk-reward ratio.
If this trader wins that trade only 40% of the time but consistently holds to a 2:1 ratio, the math still works out in their favor over a large sample, because each winner more than offsets two losers.
What's a good number?
Most traders aim for a risk-reward ratio somewhere between 1.5:1 and 3:1. Ratios below 1:1 are workable but require a high win rate (60%+) to stay profitable, since each loser costs more than each winner earns.
Ratios above 4:1 sound attractive but are often unrealistic in practice — targets that far out get hit rarely, and the "ratio" on paper rarely matches the ratio actually realized. It is worth comparing your planned R:R against your realized R:R over time; a large gap usually means targets or stops are being placed carelessly.
Common mistakes traders make with risk-reward ratio
- Setting an arbitrary target purely to hit a round-number ratio, instead of basing it on an actual technical level like a resistance zone or prior swing high.
- Moving the stop-loss further away after entry to artificially "improve" the ratio — this changes the risk, not the trade.
- Never comparing planned R:R against realized R:R, so a persistent gap between the two goes unnoticed.
- Fixating on risk-reward ratio alone and ignoring win rate — a great ratio with a very low win rate can still be a losing system.
TradeMind logs your stop-loss and target at entry and compares them against the actual exit, so you can see your planned versus realized risk-reward ratio for every trade automatically in your journal.