Risk-Reward Calculator: How to Trade Only When the Math Is in Your Favour
- Risk-Reward Ratio (RRR) compares how much you stand to gain vs. how much you risk losing on any trade. A 1:3 RRR means risking ₹1 to potentially make ₹3.
- Most professional traders refuse to enter trades with RRR below 1:2 — the math of long-term profitability demands it.
- A trader winning only 40% of trades can still be profitable if average RRR is 1:3 — expectancy is what matters, not win rate alone.
- Stop-loss is not optional — without a defined exit, you cannot calculate RRR, and without RRR, you are gambling.
Use our free Risk-Reward Calculator to compute RRR for any trade, find minimum win rate needed to be profitable, and calculate your trading expectancy.
Risk-Reward Ratio Formula
RRR = (Target Price − Entry Price) ÷ (Entry Price − Stop Loss)
Or equivalently:
RRR = Potential Profit ÷ Potential Loss
Example — Long trade on Reliance Industries:
- Entry: ₹2,800
- Stop Loss: ₹2,730 (risk = ₹70/share)
- Target: ₹2,980 (reward = ₹180/share)
- RRR = ₹180 ÷ ₹70 = 1:2.57
For every ₹1 you risk, you stand to make ₹2.57. This is a tradeable setup for most disciplined traders.
Why RRR Determines Long-Term Profitability
Most traders obsess over win rate — "I need to win 70% of trades." But win rate means nothing without RRR. The two together determine expectancy — the average profit per trade.
Expectancy Formula:
Expectancy = (Win Rate × Average Win) − (Loss Rate × Average Loss)
Scenario comparisons:
| Strategy | Win Rate | Avg Win | Avg Loss | Expectancy per ₹1 risked |
|---|---|---|---|---|
| A | 70% | ₹1,000 | ₹3,000 | −₹200 (losing strategy!) |
| B | 40% | ₹3,000 | ₹1,000 | +₹800 (profitable!) |
| C | 50% | ₹2,000 | ₹1,000 | +₹500 (solid) |
| D | 60% | ₹1,500 | ₹1,000 | +₹500 (solid) |
Strategy A wins 70% of the time but loses money — because losses are 3× wins. Strategy B wins only 40% but makes ₹800 per trade on average — because wins are 3× losses.
The minimum win rate needed at any given RRR:
| RRR | Minimum Win Rate to Break Even |
|---|---|
| 1:1 | 50% |
| 1:1.5 | 40% |
| 1:2 | 33.3% |
| 1:3 | 25% |
| 1:4 | 20% |
At RRR of 1:3, you can lose 75% of your trades and still break even. This is the mathematical power of asymmetric risk.
How to Set Entry, Stop Loss, and Target
Entry Point
Enter at a technically or fundamentally justified level — support zone, breakout confirmation, earnings catalyst. Chasing price after a move is already underway destroys your RRR.
Stop Loss: Three Methods
1. Technical stop loss (most common): Place stop loss just below a key support level (long trades) or above resistance (short trades). The market must prove your thesis wrong — not just wiggle.
2. Percentage stop loss: Risk a fixed % of entry price. E.g., 2–3% below entry. Simple but ignores market structure.
3. ATR-based stop loss: Stop = Entry − (N × ATR14), where ATR14 is the 14-period Average True Range. Adapts to current volatility — wider in volatile markets, tighter in calm markets.
Target: Two Methods
1. Next resistance level (technical): For long trades: target the nearest meaningful resistance. Conservative but high-probability.
2. RRR-derived target: Decide your minimum RRR first (e.g., 1:2), then calculate: Target = Entry + (2 × Risk). If entry ₹500, stop ₹480, risk = ₹20, target = ₹500 + ₹40 = ₹540.
Position Sizing and RRR Together
RRR tells you whether a trade is worth taking. Position size determines how much capital you put at risk.
Standard rule: never risk more than 1–2% of trading capital per trade.
Example — ₹5 lakh trading capital, 1% risk rule: Max loss per trade: ₹5,00,000 × 1% = ₹5,000
Trade setup: Entry ₹1,200, Stop ₹1,160, Risk per share = ₹40 Position size = ₹5,000 ÷ ₹40 = 125 shares Trade value: 125 × ₹1,200 = ₹1,50,000
Even a 5-trade losing streak loses only ₹25,000 (5% of capital) — survivable and recoverable.
Common RRR Mistakes Indian Retail Traders Make
1. Moving stop loss lower after a trade goes against you: "It will come back." This converts a controlled loss into a catastrophic one. Stop loss is sacred.
2. Booking profit early while letting losses run: Exactly backwards. Let winners run to target. Cut losers at stop. Most retail traders do the opposite.
3. Entering without defining stop loss first: If you don't know where you're wrong before you enter, you cannot calculate RRR. No stop = no trade.
4. Using 1:1 or worse RRR because "it's a sure thing": There are no sure things in markets. Even with 90% conviction, never trade with unfavourable RRR — the 10% loss scenario can wipe out many wins.
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Open Risk-Reward Calculator →Disclaimer: This article is for educational purposes only and does not constitute financial, investment, or trading advice. Financial markets involve risk of loss. Past performance does not guarantee future results. Please consult a SEBI-registered investment advisor before making any financial decisions.