Risk-Reward Ratio

In one line: If your wins are bigger than your losses, you can be wrong more often than right and still make money.

🎯 What you'll learn

• What the risk-reward ratio (RR) means.
• Why RR matters more than being "right" all the time.
• How you can win only 40% of trades and still profit.
• What expectancy is, in plain words.
• The win-rate you need to break even at different RR.

📘 Key concepts

What is the risk-reward ratio (RR)?

RR compares two things: what you risk versus what you aim to gain.

• Risk = how much money you are ready to lose if the trade goes wrong.
• Reward = how much money you aim to make if the trade goes right.
• Write it as risk : reward.
• Example: you risk 10 to try to make 20. That is 1:2.
• Think of a shopkeeper. He spends 10 rupees on a mango. He hopes to sell it for 30. Small cost, bigger gain. Good deal.
• Rule of thumb: prefer trades where reward is at least twice the risk (1:2 or better).

Why being "right" is not enough

Many beginners think they must win almost every trade. That is not true.

• A high win rate ("win rate" = how often your trades make money) feels nice.
• But if your losses are big and your wins are tiny, you still lose.
• With good RR, a few big wins pay for many small losses.
• Let winners run bigger than losers. This is the whole game.

Expectancy — the profit engine

Expectancy tells you if your trading plan makes money over many trades.

• In plain words: (win% × average win) − (loss% × average loss).
• Positive expectancy = the plan makes money over time.
• Negative expectancy = the plan loses money over time, no matter how lucky you feel.
• One trade is like one ball in cricket. Anything can happen.
• Expectancy is your batting average over the whole season. That is what counts.

🔍 Example

You take 10 trades. You risk ₹1,000 on each. Your RR is 1:2, so each win makes ₹2,000.

You win only 4 trades and lose 6. Win rate = 40%.

Wins:   4 × +2,000 = +8,000
Losses: 6 × -1,000 = -6,000
-------------------------------
Net result:          +2,000

• You were wrong more often than right (only 40% wins).
• You still ended with +₹2,000.
• The reason: each win was double the size of each loss.
• This is why quality of trades beats quantity of trades.

⚠️ Common mistakes

• Taking trades with poor RR (like 2:1 — risking more than you aim to make).
• Cutting winners too early, so wins stay small.
• Holding losers too long, so losses grow big.
• Chasing a high win rate while ignoring the size of each win and loss.
• Taking many trades for excitement instead of a few good ones.

✅ Key takeaways

• RR compares what you risk to what you aim to gain (risk : reward).
• Aim for at least 1:2 on most trades.
• With 1:2, a 40% win rate can still make money.
• Positive expectancy means the plan profits over time.
• Quality over quantity — skip poor-RR setups.

📝 Quick check

1. Q: You risk ₹500 to aim for ₹1,500. What is your RR? A: 1:3 (reward is three times the risk).
2. Q: At 1:2 RR, roughly what win rate do you need just to break even? A: About 34% — so winning more than that starts to make money.
3. Q: Why can a 40% win rate still be profitable? A: Because each win is bigger than each loss, so a few wins cover many small losses.

Break-even win rate by RR (rough guide):

RR	Win rate to break even
1:1	~50%
1:2	~34%
1:3	~25%

Better RR means you need fewer wins just to stay even. Everything above that line is profit.

📖 New words

• Risk-reward ratio (RR) — a comparison of how much you risk to how much you aim to gain, written as risk : reward.
• Risk — the money you are willing to lose if a trade goes wrong.
• Reward — the money you aim to make if a trade goes right.
• Win rate — how often your trades make money, shown as a percentage.
• Expectancy — the average money a trading plan makes per trade over many trades; positive means it profits over time.
• Break-even — the point where total wins equal total losses, so you neither gain nor lose.

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Educational content only — not financial advice. Trading involves the risk of losing money.