Risk-reward ratio: why a small risk and a bigger target is the whole game

The risk-reward ratio compares what you will lose if your stop loss is hit with what you will gain if your target is hit. Risking ₹10 a share to make ₹20 is a ratio of 1:2. It matters because it sets the win rate you need just to break even: at 1:2 you can be wrong on more than half your trades and still not lose money before costs. It does not make any single trade more likely to work.

The four things to fix before you enter

In the video, Vikas opens with one rule: learn to take a small risk. "Chota sa risk lena seekhein" (learn to take a small risk). Not because a small risk makes profit certain, since nothing does and most traders lose, but because a small, defined loss is what keeps you in the market long enough to get better at it.

He then lists four things a trader must know before every trade:

1. The stop loss, which he shortens to SL.
2. The entry.
3. The exit.
4. When to book profit.

The rest of the video, and this lesson, is about the first one and the fourth one, because those are where the risk-reward ratio lives.

Why the stop loss comes first

Vikas's example is gold, bought at ₹90,000 with a capital of ₹1,00,000. A professional, he says, places a stop-loss at ₹89,500 the moment the trade is on. If the market falls through it, the loss is 500 points and no more. The person without a stop says "SL ki zaroorat nahi, average bana lenge" (no need for a stop, we will average down). Then the market falls 2,000 or 5,000 points and the capital is gone.

His images for this are worth keeping. The stop loss is your kavach, your armour; go into battle without it and you lose. In cricket, you can only score runs while you still have wickets. And the line he attributes to a writer: if losing a finger saves the hand, let the finger go.

The objection everyone raises is real: markets do hit stops and then reverse to where you wanted to go. That happens. It is the price of the armour. The alternative, no stop, works right up until the one time it does not, and that one time ends the account. Why most people lose money is largely a lesson about that one time.

What the ratio means, in rupees

Take SBI at ₹500. The chart shows support just below ₹490 and resistance around ₹520.

• Entry: ₹500
• Stop loss: ₹490, risk ₹10 a share
• Target: ₹520, reward ₹20 a share

That is a risk-reward ratio of 1:2. With 100 shares, you are risking ₹1,000 to make ₹2,000. The ratio is fixed before the order goes in. If you cannot find a target at least as far away as your stop, the trade does not have a ratio worth taking, no matter how good the setup looks.

The stop and target must come from the chart. Vikas is specific about this: watch two to four instruments, not hundreds, so that you know where their recent highs and lows are and where a level is likely to hold. Support and resistance shows how those levels are drawn. A target picked to make the ratio look good, with no level behind it, is not a target. It is a wish.

The break-even maths

This is the part that turns the ratio from a slogan into a tool.

Break-even win rate = risk ÷ (risk + reward)

• 1:1 ratio: 1 ÷ 2 = 50%. You must win half your trades just to break even.
• 1:2 ratio: 1 ÷ 3 = 33.3%. You can lose two of every three trades.
• 1:3 ratio: 1 ÷ 4 = 25%. You can lose three of every four.
• 2:1 ratio (risking ₹20 to make ₹10): 2 ÷ 3 = 66.7%. You must win two of every three.

Now run the SBI trade ten times with 100 shares each, at 1:2.

• 4 wins and 6 losses: 4 × ₹2,000 − 6 × ₹1,000 = +₹2,000, before costs.
• 3 wins and 7 losses: 3 × ₹2,000 − 7 × ₹1,000 = −₹1,000, before costs.

Ten trades at 1:1 with the same 4 wins would be 4 × ₹1,000 − 6 × ₹1,000 = −₹2,000. Same analysis, same win rate, opposite result. That is why the ratio is called the whole game. It is the only part of the outcome you fully control.

Costs sit on top of all of this. Brokerage, taxes and the spread take a fixed slice from every trade, so your real break-even win rate is a few points higher than the formula says. Over many trades that slice is not small.

The catch: bigger targets get hit less often

If 1:2 needs only a 33% win rate, why not aim for 1:5 and be right one time in six? Because the market does not adjust to your ratio. A target five times further away than your stop is reached far less often than a target twice as far. Push the ratio up and the win rate falls to meet it. There is no free number.

Vikas raises this from the other side. He points out that price often turns 10, 20 or 50 points short of a target, and people who insist on the exact number watch a good trade become a loss. His advice is to book what the market gives. The honest reconciliation is this: set a realistic target from a real level, and have a rule for what you do when price gets close, whether that is taking part of the position off or moving the stop up behind the price. Both are decided in advance, not while watching the screen.

Small profits have their own cost. If you routinely book at 1:0.5, you need a win rate above 67% to survive, and few methods deliver that. Booking early feels safe and is often the more expensive habit.

Entry, exit and closing the shop

Two more of Vikas's rules belong here.

On entry, he says do not be Abhimanyu, who knew how to enter the chakravyuh but not how to get out. Half knowledge is the entry without the exit. Before the order, you know the stop, the target and what you will do in between.

On exit, his image is a shopkeeper. If you opened the shop in the morning, close it in the evening. A position left open and unmanaged is a shop with the shutter up and nobody inside. Whatever your timeframe, a trade has a planned end, and the plan includes the case where nothing happens.

And the symmetry he ends on: if you want to take a 10% gain from the market, you must be able to accept a 10% loss. What you must never do is turn a refused 10% loss into a 100% loss.

Common mistakes

• Choosing the target to make the ratio look good instead of taking it from a level on the chart.
• Moving the stop loss when price approaches it. The 1:2 trade quietly becomes 3:2, and the break-even maths collapses.
• Ignoring costs and slippage, which make the real ratio worse than the planned one.
• Not knowing your own win rate. Without a trading journal, the break-even formula has nothing to compare against.
• Averaging into losers. It is a bigger position at a worse ratio.
• Treating a good ratio as a prediction. It says nothing about whether this trade works, only about what happens across many.

Key takeaways

• Risk-reward ratio = potential loss at the stop versus potential gain at the target, fixed before entry.
• Break-even win rate = risk ÷ (risk + reward). At 1:2 it is 33%, at 1:1 it is 50%.
• The stop loss comes first and never moves further away. It is the armour, not the enemy.
• Bigger targets are hit less often; the ratio and the win rate move against each other.
• Know your stop, entry, exit and profit rule before the order. Then close the shop.