Glossary · Risk & Execution
Risk-Reward Ratio
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The risk-reward ratio is the amount a trade risks (distance from entry to stop-loss) compared with the amount it stands to gain (distance from entry to target), written as risk:reward. A trade risking ₹50 to make ₹100 has a risk-reward ratio of 1:2. It is set before entry by where you place the stop-loss and target — one of the few trade parameters entirely under your control.
Example
You buy a NIFTY futures position at 25,000 with a stop at 24,950 and a target at 25,100.
- Risk = 25,000 − 24,950 = 50 points
- Reward = 25,100 − 25,000 = 100 points
- Risk-reward = 50:100 = 1:2
On one lot of 75 units, that is ₹3,750 risked to target ₹7,500 (hypothetical, ignoring costs). The break-even win rate for any ratio is risk ÷ (risk + reward): a 1:2 trade needs to win just over 33% of the time to break even before costs; a 2:1 trade needs 67%.
Why it matters
Risk-reward and win rate are two halves of one equation — expectancy — and improving one usually worsens the other: wider targets are hit less often. Systematic traders don’t chase a “good” ratio in isolation; they backtest the combination over hundreds of trades and check that expectancy stays positive after brokerage, STT and slippage. A rule of thumb like “never take less than 1:2” only survives if the win rate the market actually gives you supports it.
In INDfolio AI, stop and target rules are part of the strategy definition, so every backtest reports the realized risk-reward alongside win rate.