Stock Market · Technical Analysis

Risk-reward ratios

The most important concept in trading

You don't need to be right 70% of the time to be profitable. You just need to make more when you're right than you lose when you're wrong. This is the power of risk-reward ratios.

What is a risk-reward ratio?

Risk = how much you lose if the trade goes against you (distance to your stop-loss).

Reward = how much you gain if the trade hits your target.

A 1:3 risk-reward means: for every ₹1 risked, you aim to make ₹3.

> Example: Entry at ₹100, stop at ₹95 (₹5 risk), target at ₹115 (₹15 reward) = 1:3 risk-reward.

The math of survival

With a 1:3 risk-reward, you can be wrong 60% of the time and still break even. Win 4 trades out of 10 and you're profitable.

• 4 wins × ₹15 = ₹60 gained
• 6 losses × ₹5 = ₹30 lost
• Net profit: ₹30 on 10 trades

This is why risk-reward matters more than win rate.

1:3the minimum risk-reward ratio most professional traders require before entering a trade

Position sizing, the other half

Knowing your risk per trade is only half the equation. How much capital you allocate completes it.

Common rule: risk no more than 1–2% of your total capital on any single trade.

If your capital is ₹1,00,000 and you risk 2% per trade = ₹2,000 per trade. If your stop is ₹5 away from entry, position size = ₹2,000 ÷ ₹5 = 400 shares.

The two deadly mistakes

1. Trading without a stop-loss: Unlimited downside. One bad trade can wipe months of gains.

2. Moving your stop-loss: If you set a stop, honour it. Moving it because 'the stock will come back' is how catastrophic losses happen.

Your edge is in the setup, not the outcome

Each individual trade has an uncertain outcome. Your edge is in consistently applying good risk-reward and position sizing across hundreds of trades.

Takeaway. A 1:3 risk-reward means 4 wins out of 10 is profitable. Risk 1–2% per trade maximum. Never move your stop-loss against you.