Stock Market · Risk Management & Psychology

Risk-reward ratios in practice

Every trade has two numbers that matter: how much you'll lose if wrong (risk) and how much you'll make if right (reward). Their ratio determines whether the trade is even worth taking.

The minimum acceptable ratio

Most professional traders refuse trades with risk-reward worse than 1:2. Meaning the potential profit must be at least twice the risked loss.

Why? Because you don't need to win every trade. With 1:2 R:R, you can lose 60% of your trades and still be profitable.

> A 40% win rate with 1:2 R:R is more profitable than a 55% win rate with 1:1 R:R. Math doesn't care about feeling right.

The math

10 trades at 1:2 risk-reward, risk ₹1,000 each.

• Win 4 trades × ₹2,000 = +₹8,000
• Lose 6 trades × ₹1,000 = −₹6,000
• Net: +₹2,000 profit on 40% win rate

Calculating before entry

Before entering ANY trade, write down:

• Entry: ₹500
• Stop loss: ₹480 (risk ₹20)
• Target: ₹540 (reward ₹40)
• Risk:Reward = 1:2 ✓

If the target requires ratios worse than 1:2, skip the trade.

Common mistake

Setting targets based on hope, not structure. Pros use:

• Next resistance level
• Measured move from chart pattern
• Fibonacci extension

Not 'I'd like 50% gains'.

1:1 R:Rneed 50%+ win rate to break even

1:2 R:Rneed 33%+ win rate to be profitable

1:3 R:Rneed 25%+ win rate to be profitable

Takeaway. Require minimum 1:2 risk-reward on every trade. Potential profit at least 2x the risked loss. With 1:2 R:R, you can lose 60% of trades and still be profitable. Skip trades that don't clear this bar.