Risk Reward Ratio and Break-Even Win Rate

Calculate risk reward and break-even win rate using a worked trading example, then see how fees and changing realised outcomes affect the result.

By Shubham Singh · Educational guide

A risk–reward ratio compares a planned loss with a planned profit. It does not measure the probability of reaching either outcome. In this guide, 1:2 means one unit of risk for two units of potential reward. Check the convention whenever comparing tools.

Calculate risk and reward separately

For a long trade, price risk per share is entry minus stop, and reward per share is target minus entry. For a short trade, the direction reverses. Multiply each distance by quantity, then include charges in the loss and deduct them from the profit.

Break-even win rate = loss per losing trade ÷ (profit per winning trade + loss per losing trade)

A worked example before and after costs

Buy 100 shares at ₹500, plan a stop at ₹490 and a target at ₹520. Gross planned loss is ₹1,000 and gross planned profit is ₹2,000: a 1:2 ratio. With exactly those two outcomes and no costs, the break-even win rate is 1,000 ÷ 3,000 = 33.33%.

Now assume ₹100 combined entry and exit costs for either outcome. Net profit is ₹1,900, while net loss is ₹1,100. The ratio becomes approximately 1:1.73, and the break-even win rate rises to 1,100 ÷ 3,000 = 36.67%. This example ignores slippage and variable costs.

Compare the plan with actual trades

If 40% of trades win under that simplified cost-adjusted model, average outcome is 0.40 × ₹1,900 − 0.60 × ₹1,100 = ₹100 per trade. That arithmetic does not establish that a strategy will achieve a 40% win rate. Estimate actual win rates and average outcomes from a sufficiently representative record rather than choosing an attractive target.

  1. Enter direction, entry, stop, target and quantity.
  2. Include a realistic estimate of charges.
  3. Compare the break-even rate with evidence, not confidence.
  4. Reassess when stops, targets or costs change.

Why a high ratio can still lose money

A distant target may be reached less often. Partial exits, early exits and price gaps mean realised wins and losses differ from planned ones. A sequence of losing trades can also create substantial drawdown even when an average-outcome model is positive. Use the ratio alongside position sizing, not instead of it.

For context, see CME Group’s risk-management trade-plan lesson.

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