What It Means
Risk-reward ratio compares how much a trader stands to lose against how much they stand to gain on a trade — for example, risking ₹1 to potentially make ₹2 is a 1:2 risk-reward ratio.
How It Works
A favorable risk-reward ratio doesn't guarantee profitability on its own — it has to be weighed against your actual win rate. A trader with a 1:3 risk-reward ratio can still lose money overall if they're wrong on more than 75% of trades, while a trader with a 1:1 ratio can be solidly profitable at a 60% win rate. The two numbers only mean something together, which is why judging a single trade's risk-reward in isolation, without any sense of how often setups like it actually work out, gives an incomplete picture.
Example
A trader buys a stock at ₹500, places a stop-loss at ₹480 (risking ₹20 per share) and a target at ₹560 (aiming for ₹60 per share). That's a 1:3 risk-reward ratio — for every rupee risked, ₹3 is targeted — regardless of what happens to that specific trade.