Risk and reward
Break-even hit rate from the reward-to-risk ratio
The reward-to-risk ratio is the target distance divided by the stop distance. If you aim to make twice what you risk, the ratio is 2 to 1. The break-even hit rate is the win rate that leaves you with exactly zero before costs. For a ratio of 2 to 1, the break-even rate is 1 divided by (1 plus 2), which is about 33.3 per cent. That means 34 winners in every 100 trades are needed just to stay above zero.
For a ratio of 1 to 1, the break-even rate is 1 divided by (1 plus 1), which is 50 per cent. For a ratio of 3 to 1, it is 1 divided by (1 plus 3), which is 25 per cent. The pattern is fixed: a larger reward per unit of risk lowers the win rate you need. But a larger target is often farther away, so it may be reached less often. The arithmetic does not tell you which ratio you will actually achieve.
On USD/INR around 83.2500, one pip is 0.0001 rupees per dollar. If you trade 10,000 dollars, one pip is 1 rupee. A stop 50 pips away risks 50 rupees. A target 100 pips away aims for 100 rupees. That is a 2 to 1 ratio. If the spread is 2 pips, you start 2 rupees behind. The break-even hit rate rises slightly because of that cost.
Why the available ratio is not fixed
The ratio you can get depends on where price has room to move. If the market is ranging in a narrow band, a large target may sit beyond the band and never be reached. If a news event is due, the range may widen suddenly. You cannot set a 3 to 1 ratio just by wishing for it. You must look at the chart and see where the nearest resistance and support are.
Liquidity also matters. Near a round number like 83.2500, many orders may cluster. Price can stall or jump. Your target may be hit only after a delay, or your stop may be triggered by a brief spike. The ratio you plan is not the ratio you always get. Slippage can make the realised reward smaller and the realised risk larger.
Costs vary between brokers and can change during the day. The spread on USD/INR is not the same at all hours. It is often wider when the Indian market is closed and narrower when it is active. Commission, if any, adds to the cost. So the net ratio after costs is lower than the gross ratio you see on the chart. You must subtract the spread and charges from your target and add them to your risk.
Choosing a ratio you can live with
A ratio of 1 to 2 means you risk twice what you aim to make. The break-even hit rate is 1 divided by (1 plus 0.5), which is about 66.7 per cent. You would need 67 winners in 100 trades just to break even before costs. That is a very high demand. Many experienced traders avoid such ratios because the margin for error is thin.
A ratio of 2 to 1 needs about 34 winners in 100. A ratio of 3 to 1 needs 25 winners in 100. But a high ratio often comes with a lower win rate because the target is farther away. There is no free lunch. You must test your own entries and see what ratio the market actually gives you. The ratio is a result of your method, not a setting you can force.
Write the stop and target in rupees before you enter. If the target is less than the risk, the trade needs a very high hit rate to survive. Check that arithmetic before you click, not after. The arithmetic is fixed, but the ratio you can actually get is not. That is why you must measure it trade by trade, not assume it.
Forty winners in a hundred trades at 1 to 2
| Step | Amount | Note |
|---|---|---|
| Risk on each trade | ₹1,000 | 20 pips on one standard lot of USD/INR, where one pip is ₹10 |
| Reward on each winner | ₹2,000 | 40 pips on one standard lot, twice the 20-pip risk |
| Winners in 100 trades | 40 | the hit rate used in this example |
| Losers in 100 trades | 60 | 100 trades minus 40 winners |
| Money won | ₹80,000 | 40 winners x ₹2,000 |
| Money lost | ₹60,000 | 60 losers x ₹1,000 |
| Net result | ₹20,000 | ₹80,000 minus ₹60,000 |
The broker may round the pip value, charge a spread and add commission, so the real figures can differ. Spreads and charges vary between brokers and can change during the day.
Doing it once, step by step
You will calculate the break-even hit rate for a chosen reward-to-risk ratio, then check whether that ratio is realistic on a USD/INR chart.
- 01
Write the stop distance in pips
Look at the USD/INR chart and find a level where your idea would be wrong. Measure the distance from your entry to that level in pips. For example, if entry is 83.2500 and stop is 83.2450, the distance is 50 pips. Write that number down.
- 02
Write the target distance in pips
Find a level where you would take profit. Measure the distance from entry to that level in pips. If entry is 83.2500 and target is 83.2600, the distance is 100 pips. Write that number down.
- 03
Convert both to rupees
Multiply each pip distance by the pip value for your trade size. For 10,000 dollars, one pip is 1 rupee. So 50 pips is 50 rupees and 100 pips is 100 rupees. If your trade size is different, the rupee amounts change.
- 04
Compute the reward-to-risk ratio
Divide the target rupees by the stop rupees. In the example, 100 divided by 50 equals 2. So the ratio is 2 to 1. If the target is smaller than the stop, the ratio is less than 1.
- 05
Find the break-even hit rate
Use the formula: break-even rate equals 1 divided by (1 plus ratio). For a ratio of 2, it is 1 divided by 3, which is about 33.3 per cent. That means 34 winners in 100 trades are needed before costs.
- 06
Adjust for spread and commission
Subtract the spread from your target and add it to your stop. If the spread is 2 pips, the net target is 98 pips and the net stop is 52 pips. The net ratio is 98 divided by 52, which is about 1.88. Recalculate the break-even rate with the net ratio. This gives a more realistic picture.
The mistake most people make here
Many people look only at how often they are right and ignore the size of each win against each loss. They take a small profit quickly and hold a losing trade far longer, so one loss wipes out several wins. Instead, decide the stop distance and the target distance before you enter, and write both in rupees. If the target is not at least as large as the risk, the trade needs a very high hit rate to survive. Check that arithmetic before you click, not after.Check yourself
You risk ₹1,500 per trade and aim for ₹3,000. You win 30 trades out of 100. What is the net result?
Winners: 30 x ₹3,000 = ₹90,000. Losers: 70 x ₹1,500 = ₹1,05,000. Net result: ₹90,000 minus ₹1,05,000 = minus ₹15,000, a loss.
At a risk of ₹1,000 and a reward of ₹2,000, how many winners out of 100 are needed just to break even?
Each winner adds ₹2,000 and each loser takes away ₹1,000. Break-even happens when winners x ₹2,000 equals losers x ₹1,000. With 34 winners and 66 losers: ₹68,000 minus ₹66,000 = plus ₹2,000. With 33 winners and 67 losers: ₹66,000 minus ₹67,000 = minus ₹1,000. So about 34 winners in 100 are needed to stay above zero before costs.
Questions that come up next
If I need only 34 winners in 100 at a 2 to 1 ratio, why did the Pune trader still lose money?
Because his ratio was the other way round. He risked ₹2,000 to make ₹2,000 on his winners, but let each loss run to ₹4,000, so every loss cost him twice what a win added. At that ratio the break-even hit rate is 1 divided by (1 plus 0.5), which is about 67 winners in 100. Six winners out of ten is 60 in 100, below the line, so the month ended down.
Can I simply set a wider target to get a better ratio?
You can place the target anywhere, but price has to reach it. A target far beyond the nearest resistance may never be touched, so the trade closes at the stop instead. The ratio you plan is not the ratio you get. Look at where price has actually turned before and set the target inside that room.
Does the spread change the break-even hit rate?
Yes. The spread is a cost you pay on entry, so you start behind. On USD/INR with a 2 pip spread and 10,000 dollars traded, that is 2 rupees against you before price moves. Subtract the spread and any commission from the target, and add them to the risk, then work out the break-even rate again. Spreads vary between brokers and can widen when the Indian market is closed.
What happens if my stop is triggered by a brief spike rather than a real move?
Your loss is still taken at the stop, and slippage can make it larger than planned. Near a round number like 83.2500, orders may cluster and price can jump through your level quickly. This is one reason the realised ratio is often worse than the one drawn on the chart. Place the stop where the idea is wrong, not where the money feels comfortable.
Is a 3 to 1 ratio always better than 2 to 1?
Not automatically. A 3 to 1 ratio needs only 25 winners in 100 to break even, which sounds easier, but the target is farther away and may be reached far less often. If the market is ranging in a narrow band, that target sits outside the band. The arithmetic is fixed; which ratio you can actually achieve is not.
How do I write the stop and target in rupees before I enter?
Convert both distances using the pip value for your trade size. At 10,000 dollars on USD/INR, one pip is 1 rupee, so a 50 pip stop is ₹50 and a 100 pip target is ₹100. Write both numbers down, add the spread and charges to the risk, and check the ratio. If the target is not at least as large as the risk, the trade needs a very high hit rate to survive.
The words used on this page
- Reward-to-risk ratio
- The target distance divided by the stop distance. A target twice as far as the stop gives a ratio of 2 to 1. It tells you how much you aim to make for each rupee you put at risk.
- Break-even hit rate
- The share of trades you must win to finish at exactly zero, before costs. For a 2 to 1 ratio it is about 33.3 per cent, so 34 winners in 100. Below that rate the account loses money.
- Pip
- A small fixed step in a currency price. On USD/INR one pip is 0.0001 rupees per dollar. At a trade size of 10,000 dollars, one pip equals 1 rupee.
- Spread
- The gap between the price you can buy at and the price you can sell at. It is a cost paid on entry, so you begin slightly behind. Spreads vary between brokers and can change during the day.
- Slippage
- The difference between the price you expected and the price you actually got. It can make a realised reward smaller and a realised risk larger. It is more likely when price moves quickly or orders cluster at one level.
What to take away
- The ratio between your stop and your target sets the share of trades you must win to stay above zero.
- At 2 to 1, about 34 winners in 100 are needed; at 1 to 1, about 50; at 3 to 1, about 25.
- The ratio you can actually get depends on where price has room to move, and costs lower it further.
- Write the stop and the target in rupees before you enter, not after.