Risk–reward ratio measures the relationship between planned loss and potential gain before entry. It helps traders compare setups, but it should be used alongside stop-loss quality, target realism, position size and expected win rate. A good trade plan is not about forcing every setup to fit 1:2 — it is about building a repeatable process that survives costs and execution slippage.
Before entering a trade, you should know two things: how much you could lose if the setup fails, and how much you could gain if the trade reaches its target. The relationship between these amounts is called the risk–reward ratio.
Risk–reward helps you evaluate whether a trade’s potential return is reasonable compared with the amount placed at risk. However, a high ratio does not automatically make a trade good. The entry, stop-loss and target must all come from a valid trading setup.
What is risk–reward ratio?
The risk–reward ratio compares the planned loss on a trade with its potential profit. For example, suppose entry price is ₹500, stop-loss is ₹480 and target is ₹540.
Your risk per share is ₹20, while your potential reward per share is ₹40. The risk–reward ratio is 1:2, meaning you are risking ₹1 for a potential reward of ₹2.
The same setup may also be described as a 2R target, where the distance between entry and stop-loss represents 1R.
Risk–reward ratio formula
For a long trade, risk is entry price minus stop-loss price, potential reward is target price minus entry price, and the reward multiple is potential reward divided by risk. The final ratio is normally written with risk fixed at one: risk–reward ratio = 1 : reward multiple.
Example: entry ₹1,000, stop-loss ₹960 and target ₹1,080. Risk per share is ₹40, potential reward is ₹80, and the reward multiple is 2. Therefore the ratio is 1:2.
Does position quantity change the ratio?
No. Quantity changes the total money at risk, but it does not change the ratio. Using 100 shares in the same example, total planned risk becomes ₹4,000 and total potential reward becomes ₹8,000, but the ratio remains 1:2.
Position quantity should be calculated separately using your account size, acceptable risk and stop-loss distance.
Risk–reward and break-even win rate
Risk–reward must be considered alongside win rate. A strategy does not need to win every trade. It needs a combination of win rate and average reward that produces positive expectancy over many trades.
The simplified break-even win-rate formula is break-even win rate = 1 ÷ (1 + reward multiple). This ignores brokerage, taxes, slippage and other costs.
| Risk–reward ratio | Reward multiple | Simplified break-even win rate |
|---|---|---|
| 1:1 | 1R | 50% |
| 1:1.5 | 1.5R | 40% |
| 1:2 | 2R | 33.33% |
| 1:3 | 3R | 25% |
At a 1:2 ratio, a trader would theoretically need to win more than approximately one-third of trades to remain profitable before costs, provided the average winner is actually twice the average loser.
Is 1:2 a good risk–reward ratio?
A 1:2 ratio is commonly used as a planning reference, but it is not automatically suitable for every setup. A useful ratio depends on market structure, stop-loss placement, target realism, volatility, holding period, historical strategy win rate, slippage, trading costs and execution quality.
A 1:2 setup with an unrealistic target may be worse than a 1:1.5 setup based on a clear resistance level. The correct sequence is to identify a valid entry, place the stop where the trade idea becomes invalid, set a realistic target using market structure and then calculate the ratio.
Risk–reward example for equity swing trading
Suppose a swing trader identifies the following setup: entry ₹750, stop-loss ₹720, target ₹825 and quantity 150 shares. Risk per share is ₹30, potential reward is ₹75, and the reward multiple is 2.5R. The risk–reward ratio is 1:2.5.
Total planned risk is ₹4,500 and total potential reward is ₹11,250. This does not guarantee that the target will be reached. It simply defines the planned relationship between risk and potential reward.
Planned risk–reward vs realised R
Stop Journaling in Excel. Connect 35+ Brokers Free.
Eliminate manual spreadsheet logging. QbarTrade automatically syncs trades, calculates true performance metrics, and gives you actionable process analytics.
One of the most important distinctions is between the ratio planned before entry and the result achieved after exit. If you planned a 1:2 ratio but exited at ₹530 on a setup that was originally planned with entry ₹500 and stop-loss ₹480, your realised result would be 1.5R, even though the planned reward was 2R.
Actual results can differ because of partial profit booking, trailing stops, early exits, slippage, price gaps, brokerage and taxes. This is why traders should review planned R versus realised R in their trading journal.
Common risk–reward mistakes
- →Forcing every trade to meet 1:2
- →Setting an unrealistic target
- →Using an arbitrary stop-loss
- →Ignoring position size
- →Ignoring costs and slippage
- →Reviewing only winning trades
Calculate and save the trade before entry
A risk–reward ratio becomes useful when the entry, stop-loss and target are defined before execution. The free QbarTrade Risk–Reward Calculator supports long and short setups and calculates planned risk, potential reward, R-multiple, monetary values and simplified break-even win rate.
Use the risk–reward calculator before entry and connect the same plan with the QbarTrade trade planner so your planned setup and realised result stay in one place.
Frequently asked questions
What does a 1:2 risk–reward ratio mean?
It means the potential reward is twice the planned risk. If you risk ₹1,000, the planned reward is ₹2,000.
Is a higher risk–reward ratio always better?
No. A higher ratio may require a more distant target that is less likely to be reached. The target and stop-loss must be realistic for the setup.
What is the break-even win rate for a 1:2 ratio?
Ignoring costs, the simplified break-even win rate is approximately 33.33%.
Is risk–reward the same as position sizing?
No. Risk–reward compares the distance between entry, stop-loss and target. Position sizing determines how many shares or contracts to trade.
What is an R-multiple?
An R-multiple expresses the result relative to the trade’s original risk. A gain equal to twice the initial risk is +2R, while a full planned loss is -1R.
Should swing traders always target 1:2?
Not necessarily. Swing traders should use targets supported by price structure and review the historical win rate and realised payoff of their strategy.
Final takeaway
Risk–reward ratio helps traders define the relationship between what they may lose and what they may gain. But the ratio should not be used in isolation. A complete trade plan connects a valid entry, logical stop-loss, realistic target, position size and account risk.
“Use risk–reward to evaluate a setup before entry, then compare the planned ratio with the realised result after the trade closes.”
This article is provided for educational purposes only and does not constitute investment advice, financial advice or a recommendation to buy or sell any security. Trading involves risk, including the possible loss of capital. Stop-losses, targets and calculated ratios do not guarantee execution prices or profitable outcomes.
Stop Journaling in Excel. Connect 35+ Brokers Free.
Eliminate manual spreadsheet logging. QbarTrade automatically syncs trades, calculates true performance metrics, and gives you actionable process analytics.
- 1-Click API auto-sync & contract note imports
- Unified multi-broker portfolio & P&L analytics
- Free plan available with unlimited manual journaling
Anish Padelkar
Anish Padelkar is a B.E. in Information Technology and has over years of trading experience, including working closely with a proprietary trading firm. At QbarTrade, he works in product management, using technology to simplify trading workflows and help traders make more informed decisions.