Risk management is one of the most important aspects of trading in the share market / stock market , doing stock trading without having a proper risk management plan is like going on war with a butter knife in your hand , risk to reward ratio is an integral part of risk management and risk to reward ratio must be calculated for every trade before it’s execution in order to access it’s favourability.
Why is risk management important ?
Risk management is important to make your trading consistent and to protect your profits in an overall perspective in the stock market , we all know that every trade must have a target amount where you will take your profits and the stop loss where you will cover your losses , risk to reward ratio uses these targets and stop loss levels to calculate favourability of trades that you plan to take .So now we will understand risk to reward ratio’s importance with an example – suppose you took 10 trades where you risked 1:1 that is you risked Rs 1 to gain Rs 1 , and you had 6 wins and 4 losses so overall you gained only 2 Rs profit , now if you had a 1:2 risk to reward ratio and you took 10 trades you won 6 and lost 4 , so you gained Rs 8 overall , which is much better than 2 Rs gain , in real world with large number of shares or lots in trades this will make a huge difference overall.
Risk to Reward Ratio Calculator
Enter details below and calculate the R2R ratio
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So above we see how you can calculate the risk to reward ratio by entering the CMP ( current market price of share or stock ) , your target and stop loss prices , as discussed above the less the risk and more the reward the better the trade it is , it isn’t always possible to have such low risk but a good stock trader knows how to find such trades with good R2R .
Risk to reward greater than 1:2 is Favourable –
A favourable risk to reward ratio is always greater than equal to 1:2 that is if you are risking 1Rs you should make at least 2Rs if the trade goes into your favour , there is no point in having a risk to reward ratio of less than 1:2 because that would essentially mean that you are risking more to make a little which is totally wrong as you can loose and go into losses by taking such unfavourable trades with risk to reward ratio less than 1:2 , taking a trade having less than 1:2 risk to reward is not worth your time , move on and find a better trade , if you can’t find it today don’t worry the share market or stock market will open tomorrow .