Performance Metric
Risk-Reward Ratio — Definition & Example
The ratio of expected profit to potential loss on a single trade — usually expressed as e.g. "1:2".
Risk-reward ratio (R:R or RR) measures how much you stand to make versus how much you risk on a trade. A 1:2 ratio means you risk ₹1 to make ₹2; a 1:0.5 ratio means you risk ₹2 to make ₹1. Strategies with R:R below 1:1 require >50% win rate just to break even before costs. R:R is the easiest variable to control: by setting the stop and target levels, you decide R:R before entering. Many losing retail strategies have R:R below 1:1 combined with sub-50% win rate — guaranteed unprofitable.
Formula
R:R = Distance to Target / Distance to Stop (often written as 1:N where N is the multiple)Example
Entry ₹100, stop ₹98, target ₹104. Distance to stop = ₹2, distance to target = ₹4. R:R = 4/2 = 2.0, written as 1:2.
Related
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