Glossary

Risk-reward ratio: meaning, example and why it matters

The amount you stand to lose if a trade goes wrong compared with the amount you aim to gain if it works. A favourable ratio does not by itself make a trade likely to work.

Worked example

Entry ₹100, an exit if it falls to ₹95 (risk ₹5) and a goal of ₹110 (reward ₹10) is a ratio of 1 to 2. If such trades worked one time in three, the average result would be (1/3 × 10) − (2/3 × 5) = ₹0 per share, so the ratio alone does not decide the outcome.

Illustrative numbers for explanation only. They are not market data, a forecast or a suggestion.

Why it matters

It compares what you could lose with what you hope to gain, but it only means something together with how often a trade works.

Related terms

Stop-loss orderPosition sizing

See it in practice

Position size calculator

Frequently asked questions

Is a higher risk-reward ratio always better?

No. A larger reward target usually works less often, so the ratio has to be read with the success rate.

Is this page investment advice?

No. Risk-reward ratio is explained in general terms with illustrative numbers. Market Dekho is not a SEBI-registered Research Analyst or Investment Adviser.

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Educational content, not investment advice. Market Dekho is not a SEBI-registered Research Analyst or Investment Adviser. Spotted a mistake? Email marketdekho01@gmail.com.