Evaluate Risk and Reward in a Trade

The formula

For a short trade, reverse the subtractions. The ratio is usually written with the risk as 1, so a trade risking ₹30 to make ₹60 is 1:2, and a trade risking ₹30 to make ₹20 is 1:0.67.

Using the risk-reward calculator

Enter the entry price, stop loss and target, and the lot size or quantity. The calculator returns:

• the ratio,
• the rupee amount at risk and the rupee gain at the target,
• the breakeven win rate: the share of trades that must win for the strategy to break even, and
• the expectancy per trade for a win rate you enter.

The position size calculator then converts the rupee risk into a number of lots for your account.

The breakeven win rate

A ratio on its own says nothing about profit. A 1:3 trade that wins 20% of the time loses money; a 1:0.5 trade that wins 80% of the time makes money. The breakeven win rate links them:

The third column shows the win rate at which the strategy earns, on average, 10% of the amount risked per trade, which is a reasonable minimum before costs. A 1:2 strategy needs to win only about 37% of its trades to earn that; a 1:1 strategy needs 55%.

Expectancy: the number that matters

Expectancy combines the ratio and the win rate into the average result per trade.

With a 1:2 ratio, ₹5,200 at risk and a 45% win rate: 0.45 × 10,400 − 0.55 × 5,200 = ₹4,680 − ₹2,860 = ₹1,820 per trade, before charges. Our guide to backtest performance metrics covers expectancy alongside the other numbers in a report.

The planned ratio and the real one

The ratio you plan is rarely the ratio you get:

• Slippage on the stop widens the real risk. A stop at 24,920 that fills at 24,905 turns an 80-point risk into 95.
• Early exits cut the reward. A trader who takes profit at 25,100 instead of 25,160 has turned a 1:2 trade into 1:1.25.
• Costs reduce both sides. On a Nifty futures round trip, STT, exchange charges and brokerage come to roughly ₹900 per lot, about 14 points.

Backtests show the realised ratio: the average winning trade divided by the average losing trade. Compare it with the planned ratio. A strategy designed at 1:2 that realises 1:1.3 is losing most of its edge to exits and slippage.

Risk-reward in options

Options complicate the ratio because the risk and reward are not fixed by price levels alone.

• Bought options. The maximum risk is the premium, but most traders stop out earlier, at 30% to 50% of the premium. The reward depends on the move and on time: a move that comes late earns less. Set the stop and target in premium terms and convert them to a ratio.
• Sold options and credit spreads. These usually have a poor ratio by design: a short straddle might collect ₹30,000 and risk ₹60,000 to a stop, a ratio of 1:0.5, and rely on a high win rate. The breakeven table shows why: at 1:0.5 the strategy needs to win two trades in three.
• Defined-risk structures. A bull call spread has a fixed maximum loss and gain, so the ratio is known at entry. In our model example the spread risks ₹8,474 to make ₹11,026, a ratio of 1:1.3, with a breakeven win rate of 43%.

For option sellers, the question is whether the win rate the strategy actually achieves exceeds the breakeven rate its ratio demands, after the occasional large loss. SEBI's September 2024 study found that 93% of individual F&O traders lost money; strategies with high win rates and poor ratios account for many of them.

Setting the ratio in a strategy

The ratio comes from where the stop and target sit, and both should come from the market, not from a number you like:

1. Place the stop where the trade idea is wrong: below the support level, beyond the opening range, or at 2 ATR from the entry. See the trailing stop loss guide for stops that follow the price.
2. Place the target where the move is likely to pause: the next resistance level, a measured move, or a multiple of ATR.
3. Compute the ratio. If it is below your minimum, usually 1:1.5 for directional trades, skip the trade rather than widening the target.
4. Size by the stop with the position size calculator, so that each trade risks the same share of capital.

In QuantPower's strategy builder, the stop and target are set as points, percentage or ATR multiples, and the backtesting engine reports the realised average win and loss, so the planned and realised ratios can be compared before the strategy trades live.

Common mistakes

• Moving the target closer. The planned ratio is only real if the target is honoured.
• Moving the stop further. A wider stop after entry changes the ratio and the size at risk.
• Demanding 1:3 on every trade. High ratios need targets the market rarely reaches, and a low win rate that is hard to follow. A consistent 1:1.5 at 50% beats an occasional 1:3 at 20%.
• Ignoring the win rate. The ratio alone proves nothing.
• Forgetting costs and slippage. On short-term trades they can be a quarter of the planned risk.

Frequently asked questions

Sources

• SEBI, Analysis of profit and loss of individual traders dealing in equity F&O, Sep 2024
• Finance Act 2026, STT rates from 1 April 2026