Strategy
Risk-Reward Ratio
The risk-reward ratio compares the distance from entry to target against the distance from entry to stop. A 1:2 ratio means the target sits twice as far away as the stop.
How it is calculated
How to read it
- It is planned, not realised. The ratio describes intent at entry; the outcome depends on which level is reached and whether the trade is held to it.
- Ratio and win rate are linked. A method with a 1:2 ratio needs to be right more than a third of the time to break even before costs; at 1:1 it needs more than half.
- Widening the target improves the stated ratio while reducing how often the target is reached. The ratio alone is therefore not comparable between methods.
What it does not tell you
- A high planned ratio means nothing if the target is rarely reached. Ratios are frequently inflated by placing targets at implausible distances.
- Exiting early is extremely common, so the realised ratio is often well below the planned one. This gap is measurable only by recording both.
- Costs reduce the realised ratio, and on Indian F&O the effect is material once STT, exchange charges and GST are applied.
Frequently asked questions
What is a good risk-reward ratio?
There is no universally good value, because ratio and win rate trade off against each other. A 1:3 method that is right 20% of the time and a 1:1 method that is right 60% of the time can produce similar outcomes before costs.
Does a 1:2 ratio mean I will be profitable?
No. It describes the shape of the planned trade only. Profitability depends on how often the target is actually reached, whether trades are held to it, and what costs are incurred.
Why is my realised ratio worse than planned?
Usually because of early exits. Closing winners before the target while allowing losers to reach the stop compresses the realised ratio below the planned one — one of the most consistently observed patterns in trading records.
Related
- Position Sizing Basics — Strategy
- Momentum in Markets — Concept
Educational use only
This page is educational material about how a technical tool is calculated and read. It is not investment advice, not a recommendation to buy or sell anything, and not a signal service. No indicator predicts future prices. CernoQuant is a trading journal and analytics platform, not a SEBI-registered investment adviser. Trading decisions and their outcomes are yours alone.
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