Risk–Reward

What this unit covers

Learn to calculate a trade's risk-reward ratio, and why a trade with a favourable ratio can still lose.

By the end you will be able to

• Calculate a trade's risk-reward ratio from its entry, stop-loss and target prices.
• Explain why a favourable ratio does not mean a trade will win.
• Identify why the ratio must be fixed before entry, not after.

How it starts: Two Trades, Same Ratio

1. Two traders each risk 20 rupees to make 60.
2. One trade ends in profit, the other hits its stop-loss.
3. Both did the same maths before entering, so which one chose badly?

Words you will meet

Risk-reward ratio

Potential rupee gain divided by potential rupee loss on a trade, fixed before entry.

Entry price

The price at which you buy into a trade.

Stop-loss

The price at which you exit a trade to limit the loss if it moves against you.

Target price

The price at which you plan to exit a trade if it moves in your favour.

In this module: Risk Management

1. Stop Loss
2. Position Sizing
3. Risk–Reward (this unit)
4. Trade Management