The Risk-Reward Ratio (RR) compares the potential profit of a trade to its potential loss. It is the single most misunderstood concept in retail trading. Most traders obsess over win rate โ being right as often as possible. Professionals obsess over Risk-Reward โ making far more when right than they lose when wrong.
The Win Rate Myth
The Math That Changes Everything
Strategy A: 70% Win Rate, 1:1 RR
10 trades: 7 wins ร โน1,000 โ 3 losses ร โน1,000 = +โน4,000 profit โ
Strategy B: 40% Win Rate, 1:3 RR
10 trades: 4 wins ร โน3,000 โ 6 losses ร โน1,000 = +โน6,000 profit โโ
Strategy C: 70% Win Rate, 1:0.5 RR (wins smaller than losses)
10 trades: 7 wins ร โน500 โ 3 losses ร โน1,000 = +โน500 only
Barely profitable โ one bad period wipes it out โ
Break-Even Win Rate by Risk-Reward
| Risk-Reward Ratio | Break-Even Win Rate | Meaning |
|---|---|---|
| 1:1 | 50% | Must win more than half โ very hard long-term |
| 1:1.5 | 40% | Win 4 in 10 โ achievable |
| 1:2 | 33% | Win 1 in 3 โ very achievable |
| 1:3 | 25% | Win 1 in 4 โ even losing strategies can be profitable |
| 1:5 | 17% | Win less than 1 in 5 โ very high reward strategies |
How to Calculate RR Before Every Trade
Pre-Trade RR Checklist:
1. Identify entry price
2. Set stop loss (maximum you will lose if wrong)
3. Identify realistic target (next support/resistance/HTF liquidity)
4. Calculate: RR = (Target โ Entry) รท (Entry โ Stop)
Rule: Only take the trade if RR โฅ 2.0 (preferably 3.0+)
If the target is too close or the stop too wide โ skip the trade
1. Identify entry price
2. Set stop loss (maximum you will lose if wrong)
3. Identify realistic target (next support/resistance/HTF liquidity)
4. Calculate: RR = (Target โ Entry) รท (Entry โ Stop)
Rule: Only take the trade if RR โฅ 2.0 (preferably 3.0+)
If the target is too close or the stop too wide โ skip the trade
Realistic Targets on NSE
The target must be at a realistic price level โ not an arbitrary number that gives you a good RR on paper. Use these as target zones:
- Next major swing high/low from daily chart
- Previous week high or low
- Key horizontal support/resistance
- Fibonacci extension levels (127.2%, 161.8%)
- Next psychological round number (NIFTY 24,000, stock at โน1,000 etc.)
If you genuinely cannot find a realistic target at 1:2 or better from your entry, the trade setup is poor โ not your target-setting. A trade with only 1:1 possible RR from the entry is not worth taking regardless of how good the signal looks. Wait for a better entry closer to support or a setup with more room to run.
