The risk-to-reward ratio compares how much you could lose on a trade with how much you realistically aim to gain. It is one of the simplest ideas in trading, and one of the most important, whether you trade the Pakistan Stock Exchange, crypto or forex.
How it is calculated
Risk = distance from your entry to your stop loss. Reward = distance from your entry to your target.
Example: you buy at Rs 100, your stop loss is Rs 95 and your target is Rs 110. Risk is Rs 5, reward is Rs 10. The risk-to-reward ratio is 1:2.
Why it matters
No trader wins every trade. The ratio shows how often you need to be right to come out ahead:
| Risk : reward | Win rate needed just to break even (before costs) |
|---|---|
| 1:1 | 50% |
| 1:2 | about 33% |
| 1:3 | 25% |
With a better ratio, you can be wrong more often and still not lose money overall. Brokerage, taxes and other costs raise these numbers a little.
Keep targets realistic
A high ratio only helps if the target is realistic. Setting a target far beyond the next resistance just to make the numbers look good usually means the target is rarely reached.
Risk-to-reward is one part of risk management
It works together with position sizing, stop losses and diversification. See our guide to risk management in trading.
Want to go beyond the basics?
This guide covers the basics of the risk-to-reward ratio. Our technical analysis and trading course in Urdu takes you much further, with what this article leaves out:
- Complete trading strategies, with clear rules for entries, exits and stop losses
- Real chart examples, worked through step by step
- How to combine indicators, chart patterns and risk management into one plan
- Techniques you can apply to the Pakistan Stock Exchange, crypto, forex and other live markets
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This article is for education only and is not investment advice. Trading shares, cryptocurrencies, forex and other markets involves risk, including the loss of capital.