Orders and risk
Risk-reward ratio
Also called: R:R, RR ratio
The risk-reward ratio compares what you can lose on a trade, entry to stop-loss, with what you aim to gain, entry to target.
The risk-reward ratio compares two distances. Risk is the gap between entry and stop-loss. Reward is the gap between entry and target. If you risk 50 points to make 100, the ratio is 1:2. It is calculated before the trade, using planned levels, and sets what the trade pays if it works against what it costs if it does not.
The ratio only means something alongside how often you win. The breakeven win rate is risk divided by risk plus reward. At 1:1 you must win half your trades to break even before costs. At 1:2 you need one in three. At 1:3, one in four. A high ratio with a rarely reached target is no better than a low ratio reached often.
Costs change the picture in Indian intraday trading. Brokerage, taxes and slippage come out of every trade, win or lose. On a small stop-loss, such as a few points on a stock option, those costs are a large share of the risk, so a ratio that looks like 1:2 on the chart can be noticeably worse in your ledger.
The common mistake is fixing the ratio first and bending the levels to fit. A target pushed beyond a strong resistance just to show 1:3 is not a real target. The other mistake is quoting the planned ratio while routinely exiting early. Your realised ratio, taken from your own trade log, is the number that counts.
Worked example
A Nifty buy measured against two targets
Illustrative numbers: buy Nifty futures at 25,000 with a stop-loss at 24,950, so the risk is 50 points. The first target is 25,050 and the second is 25,100. Reward is 50 and 100 points, which gives 1:1 to the first target and 1:2 to the second. If your actual fill is 25,010, risk becomes 60 points and reward to the second target becomes 90, so that ratio drops from 1:2 to 1:1.5.
In WizeBuySell
WizeBuySell strategies mark the entry, targets and stop-loss on your chart, so you can measure risk and reward before you order. On the option strategies these are index levels, and 50 Nifty points is not 50 rupees on the premium, so work the ratio out on the premium you pay. We publish no accuracy or win-rate figures. Keep your own log during the 7-day trial at ₹199.