Risk Reward Ratio

You can surrender 50% of your trades, have a win rate of only 40%, and still become a millionaire. How? Mathematics. Specifically, the Risk to Reward Ratio (R:R).

The Concept

Every trade has a cost (Risk) and a payoff (Reward).

• Risk: Distance from Entry to Stop Loss.
• Reward: Distance from Entry to Target.

If you risk ₹1 to make ₹1 (1:1 Ratio), you need to be right 51% of the time to make money. If you risk ₹1 to make ₹3 (1:3 Ratio), you only need to be right 26% of the time to break even!

The Math of Ruin

Why do beginners blow up accounts? Negative Risk Reward.

• They book profits quickly (Making ₹5).
• They hold losers hoping they come back (Losing ₹50).
• One bad trade wipes out 10 good trades.

Note: The chart illustrates how consistent positive expectancy grows a small account exponentially compared to random betting.

Position Sizing (The 1% Rule)

Knowing R:R is useless if you bet the farm. Golden Rule: Never risk more than 1% of your total capital on a single trade.

The Formula: Shares to Buy = (Total Capital * 1%) / (Entry Price - Stop Loss Price)

Example:

• Capital: ₹1,00,000
• Risk per trade: ₹1,000 (1%)
• You want to buy Tata Motors at ₹500.
• Stop Loss is at ₹480 (Risk per share = ₹20).

Shares = 1000 / 20 = 50 Shares

If stop loss hits, you lose exactly ₹1,000. No emotions involved.

Setting Targets

Don't set targets based on your greed. Set them based on the chart.

• Wrong: "I want to make ₹5000 today."
• Right: "The next resistance level is at ₹550. That gives me a 1:3 R:R. I will take the trade."

Checklist before clicking Buy:

1. Where is my Stop Loss? (Technical Level, not random)
2. Where is my Target?
3. Is the Reward at least 2x the Risk?
   • Yes? Execute.
   • No? Skip. Even if the setup looks good.