Short answer
What is a good risk reward ratio?
A good risk reward ratio is one where the potential reward is at least twice the risk, written 1:2, and the target still sits before the next opposing zone. At 1:2 you break even with about 33.3% winning trades before costs, so the trade can stay profitable even when half or more of your trades lose.
Key takeaways
- Risk reward ratio = (target − entry) ÷ (entry − stop loss) for a buy, measured from the actual entry price.
- The break-even win rate is 1 ÷ (1 + R): 50% at 1:1, 33.3% at 1:2, 25% at 1:3 and 20% at 1:4, before costs.
- Ten trades at 1:2 with ₹1,000 risk each make +₹5,000 at 50% accuracy and +₹2,000 at 40% accuracy.
- Expectancy = (win rate × average win) − (loss rate × average loss), and it must be positive after costs.
- A higher ratio is only better if the target is realistic; a target beyond an opposing zone usually lowers the win rate.
- A wider zone means a bigger stop gap, which pushes the target further away and can make the trade fail the 1:2 test.
What is the risk reward ratio formula?
The risk reward ratio divides the distance from entry to target by the distance from entry to stop loss. Risk is what you lose if the stop is hit; reward is what you make if the target is hit. Traders write it as 1:R, so 1:2 means the reward is twice the risk. The ratio is the same whether you measure it per share or for the whole position.
Buy: R = (Target − Entry) ÷ (Entry − Stop loss) | Sell: R = (Entry − Target) ÷ (Stop loss − Entry)Always measure from the actual fill price, not from the zone line you hoped to enter at.What is a good risk reward ratio for swing trading?
For swing and positional trades taken from demand and supply zones, 1:2 is the minimum and 1:3 is preferred when the chart has room. Swing trades hold for days or weeks and absorb overnight gaps, so the reward needs to clearly outweigh the risk. Below 1:2, the win rate you need climbs quickly; well above 1:3, the target often runs into an opposing zone.
- Below 1:2: skip the trade in this framework, however attractive the zone looks.
- 1:2 to 1:3: the normal working range, provided no fresh opposing zone sits inside it.
- Above 1:3: acceptable only when the path to the target is clear on the same and higher timeframes.
What win rate do you need to break even at each risk reward ratio?
The break-even win rate is the share of winning trades at which total wins exactly cancel total losses. It equals 1 ÷ (1 + R), where R is the reward multiple. The higher the ratio, the fewer winners you need — which is why a sound ratio gives you room to be wrong. These figures ignore brokerage, taxes and slippage, which raise the real break-even point slightly.
Break-even win rate = 1 ÷ (1 + R)At 1:2, R = 2, so 1 ÷ 3 = 33.3%.| Risk reward ratio | Calculation | Break-even win rate | Winners needed out of 10 to avoid a loss |
|---|---|---|---|
| 1:1 | 1 ÷ 2 | 50.0% | 5 |
| 1:1.5 | 1 ÷ 2.5 | 40.0% | 4 |
| 1:2 | 1 ÷ 3 | 33.3% | 4 (3 wins leave a net loss) |
| 1:2.5 | 1 ÷ 3.5 | 28.6% | 3 |
| 1:3 | 1 ÷ 4 | 25.0% | 3 (2.5 is the exact break-even) |
| 1:4 | 1 ÷ 5 | 20.0% | 2 |
How does a 1:2 risk reward ratio work over 10 trades?
Looking at a series of trades rather than one trade shows why the ratio matters more than any single outcome. With a fixed ₹1,000 risk per trade and a 1:2 target, every winner earns ₹2,000 and every loser costs ₹1,000. A trader can lose more often than they win and still finish ahead, as long as stops are honoured and targets are not cut short.
What is expectancy and how do you calculate it?
Expectancy is the average amount a trading method makes or loses per trade over many trades. It combines win rate and risk reward ratio into one number. A positive expectancy means the rules are designed to make money over a long series; a negative one means more trades simply lose money faster. Measuring it in R (multiples of risk) makes different trades comparable.
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)In R terms with a fixed ratio: Expectancy = (p × R) − (1 − p), where p is the win rate.Why isn't a higher risk reward ratio automatically better?
A higher ratio only helps if price can realistically reach the target. Stretching a target from 1:2 to 1:5 looks better on paper, but if that target lies beyond a fresh supply zone, price has to break through fresh selling to get there. The win rate falls, and expectancy can end up lower than a modest target that sits in clear space.
How does zone width affect the risk reward ratio?
Because the stop sits beyond the distal line, the width of the zone largely decides the risk per share. A narrow zone gives a small stop gap, so a 1:2 target is close by and easy to fit below the next supply. A wide zone gives a large gap, pushing the 1:2 target further away and cutting the quantity you can trade for the same rupee risk.
| Setup | Entry | Stop loss | Risk per share | 1:2 target | Reward available to ₹221 | Quantity for ₹1,000 risk | Decision |
|---|---|---|---|---|---|---|---|
| Narrow zone | ₹200 | ₹195 | ₹5 | ₹210 | ₹21 = 4.2R | 200 shares | Valid |
| Wide zone | ₹200 | ₹188 | ₹12 | ₹224 | ₹21 = 1.75R | 83 shares (₹1,000 ÷ ₹12 = 83.3) | Skip — fails 1:2 |
What are the most common risk reward ratio mistakes?
Most risk reward errors come from calculating the ratio once and then changing the trade without recalculating it. The ratio is only meaningful if both the stop and target are honoured exactly as planned.
- Booking early and holding losers: cutting winners at 1R while letting losers run past the stop turns a 1:2 plan into worse than 1:1.
- Calculating from the zone line, not the fill: a later fill raises risk and lowers the real ratio.
- Ignoring costs: brokerage, taxes and slippage reduce each win and enlarge each loss, especially on tight intraday stops.
- Chasing big ratios: a 1:5 target through an opposing zone is a lower-probability trade, not a better one.
- Widening the stop mid-trade: this silently changes the ratio and the rupee risk.
- Judging the method on a few trades: expectancy only shows up over a long, consistently executed series.
Frequently asked questions
Risk reward ratio kya hota hai?
Risk reward ratio batata hai ki ek trade mein aap kitna risk le rahe ho aur badle mein kitna kama sakte ho. Entry aur stop loss ka gap risk hai, entry aur target ka gap reward. Agar ₹6 ka risk aur ₹12 ka reward hai, toh ratio 1:2 hai. Demand-supply trading mein kam se kam 1:2 rakha jata hai.
Is a 1:1 risk reward ratio ever acceptable?
At 1:1 you need more than 50% winners just to break even, and costs push that higher still. Some high-frequency styles rely on very high win rates instead of large ratios, but for zone-based swing trading a 1:1 setup leaves no margin for losing streaks. In this framework, a trade that cannot offer at least 1:2 is skipped.
Does the risk reward ratio include brokerage and taxes?
The basic formula uses price distances only. Brokerage, STT, exchange charges, GST, stamp duty and slippage all reduce net reward and enlarge net loss. On swing trades with wide gaps the effect is small; on tight intraday stops it can noticeably raise your break-even win rate. Check your broker's contract note to see real per-trade costs.
Which matters more, win rate or risk reward ratio?
Neither on its own. Expectancy combines both: a 70% win rate at 1:0.3 can lose money, while a 40% win rate at 1:2 can make money. What matters is whether (win rate × average win) exceeds (loss rate × average loss) after costs, across a large sample of trades taken with the same rules.
Should the ratio be measured to the first target or the final target?
Measure it to the price where you will actually exit. If you book half at 1:2 and trail the rest, your average realised reward is a blend of both exits, and that blended figure is what belongs in your expectancy calculation. Keep a trade journal so the numbers reflect what you did, not what you planned.
How StockNotify applies this
StockNotify's free risk-reward calculator shows the ratio, the break-even win rate and the 1R, 2R and 3R target prices for any entry and stop loss. The demand and supply rules in this lesson ask for at least 1:2 before a zone trade qualifies; the StockNotify MTFA report applies the same minimum when it reports an entry, stop loss and target.
Educational content only. Nothing here is investment advice or a recommendation to buy or sell any security. Chart diagrams use illustrative prices, not market data. Trading involves risk of loss; verify prices independently and apply your own risk process.