To apply risk/reward ratios in trading, you measure how much potential reward you aim to earn for every rupee you risk. Before entering a trade, you calculate your target profit and your stop-loss. A good practice is to look for trades with a risk/reward ratio of at least 1:2 or higher, meaning you risk ₹1 to potentially earn ₹2. This way, even with some losing trades, you can still be profitable in the long run.

What is a Risk/Reward Ratio?

The risk/reward ratio compares the amount of risk you take on a trade to the potential reward you can earn. For example, if you risk ₹100 to possibly gain ₹300, your risk/reward ratio is 1:3. A higher ratio means you're risking less to make more, which is ideal in trading to build long-term profitability even if your win rate isn't very high.

Why is Risk/Reward Ratio Important?

Using a good risk/reward ratio protects your trading capital. Even if you have more losing trades than winning ones, a strong ratio helps you stay profitable overall. It brings discipline to trading decisions, reduces emotional mistakes, and helps you focus on high-quality trade setups rather than random entries.

How to Calculate Risk/Reward Ratio?

First, determine your entry price, stop-loss level, and target price. Subtract your entry price from your stop-loss to find the risk amount. Then subtract your entry price from your target price to find the reward amount. Divide the reward by the risk to get the ratio. For example, if your risk is ₹50 and your reward is ₹150, your risk/reward ratio is 1:3.

What is an Ideal Risk/Reward Ratio?

Most traders aim for a minimum risk/reward ratio of 1:2 or higher. This means that even if you win only 40% of your trades, you can still be profitable. A 1:3 or 1:4 ratio is even better because it increases your profitability without needing a very high win rate. Always look for trades where the reward justifies the risk.

How to Apply Risk/Reward in Real Trades?

Before entering any trade, set your stop-loss and target profit levels based on the desired risk/reward ratio. Never move your stop-loss further away to chase a trade. Always stick to your planned levels. This discipline helps you survive losses and grow your account steadily over time, avoiding emotional trading mistakes.

How Risk/Reward Ratios Affect Trading Psychology?

When you know your potential loss is smaller than your potential gain, it’s easier to stay calm and confident during trades. It removes fear and greed from your decision-making. Sticking to good risk/reward setups builds consistency and gives you mental strength to follow your trading plan without hesitation.