bhala-srinivash Risk-Reward Ratio
If the math doesn't work, don't take the trade. R:R is the simplest filter that separates good setups from bad ones.
Prerequisites
No dependencies required. Pure math — provide entry, stop, and target prices. No data tools needed.
Calculation
Risk = Entry price - Stop-loss price
Reward = Target price - Entry price
R:R = Reward ÷ Risk
Example:
Entry: Rs.1,800
Stop: Rs.1,700 → Risk = Rs.100 per share
Target: Rs.2,100 → Reward = Rs.300 per share
R:R = 300 ÷ 100 = 3:1
In rupee terms:
Total risk = Risk per share × Number of shares
Total reward = Reward per share × Number of shares
Minimum R:R by Win Rate
Your win rate determines the minimum R:R needed to be profitable over time.
| Win Rate | Min R:R (Breakeven) | Recommended Min | Trades Needed to Recover 1 Loss |
|---|---|---|---|
| 30% | 2.33:1 | 3:1 | ~3 winners |
| 40% | 1.50:1 | 2:1 | ~2 winners |
| 50% | 1.00:1 | 1.5:1 | 1 winner |
| 60% | 0.67:1 | 1:1 | <1 winner |
| 70% | 0.43:1 | 0.75:1 | <1 winner |
If you don't know your win rate, assume 40-50% and require at least 2:1 R:R.
Trade Filtering Rules
| R:R Ratio | Decision |
|---|---|
| Below 1:1 | Skip — you're risking more than you can gain |
| 1:1 to 1.5:1 | Only if win rate > 55% AND high-conviction setup |
| 1.5:1 to 2:1 | Acceptable for experienced traders with edge |
| 2:1 to 3:1 | Good — standard for swing trades |
| 3:1+ | Excellent — take these trades consistently |
Multi-Target R:R
For trades with multiple profit targets (scaling out):
Target 1 (50% of position): Rs.1,900 → R:R = 1:1
Target 2 (30% of position): Rs.2,000 → R:R = 2:1
Target 3 (20% of position): Rs.2,200 → R:R = 4:1
Weighted R:R = (0.5 × 1) + (0.3 × 2) + (0.2 × 4) = 1.9:1
This is useful when you plan to scale out at different levels.
Expected Value
For a more complete picture, calculate expected value per trade:
EV = (Win rate × Average win) - (Loss rate × Average loss)
Example:
Win rate: 50%, Avg win: Rs.10,000, Avg loss: Rs.5,000
EV = (0.5 × 10,000) - (0.5 × 5,000) = Rs.2,500 per trade
Positive EV = edge. Negative EV = change your approach.
R:R Checklist
Before entering any trade:
- Have I identified a specific target (not just "it'll go up")?
- Is the stop-loss at a technically meaningful level?
- Is R:R at least 1.5:1 (ideally 2:1+)?
- Does the position size keep risk within 1-2% of capital?
- If this trade hits stop, will I still be fine psychologically and financially?