Risk-Reward Ratio
The ratio of a position's intended gain to the loss that would be taken if the thesis fails.
Formula
Risk-Reward Ratio = (Target Price - Entry Price) / (Entry Price - Stop Price)
Unit
ratio (x, times)
In depth
The ratio is meaningless without the probability of each outcome: a 5:1 ratio that succeeds one time in ten loses money, while a 1:1 ratio that succeeds seven times in ten makes it. That combination is what expectancy measures, and quoting a risk-reward ratio alone is the most common way traders mislead themselves. The ratio also assumes both levels are reachable, which the stop may not be in a gap. Its genuine value is that computing it forces the exit to be defined before the entry, which is a discipline independent of the number it produces.
Worked example
Entry ₹500, target ₹545, stop ₹485: ratio = 45 / 15 = 3. At a 30% success rate the expectancy is 0.30 x 45 - 0.70 x 15 = 13.5 - 10.5 = ₹3 a share, before costs — barely positive despite the attractive ratio.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Risk-Reward Ratio” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.