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How to Calculate Risk-Reward Ratio

The risk-reward ratio helps traders compare potential profit to possible loss in a trade. It is calculated using the formula: Risk-Reward Ratio = Potential Reward u00f7 Potential Risk. For example, if you buy a stock at u20b91,000, set a target at u20b91,100 (u20b9100 reward), and place a stop-loss at u20b9950 (u20b950 risk), your ratio is 100 u00f7 50 = 2:1. A higher ratio means better return potential for the risk taken.

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How to Calculate Risk-Reward Ratio

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  1. Read blog - https://navia.co.in/blog/what-is-risk-reward-ratio-why-it-matters/ How to Calculate Risk-Reward Ratio?

  2. Read blog - https://navia.co.in/blog/what-is-risk-reward-ratio-why-it-matters/ What Is Risk-Reward Ratio? • Risk-Reward Ratio (R:R) is a metric traders use to compare potential profit vs potential loss on a trade. • It helps in planning trades and managing risk effectively.

  3. Components of the Formula Read blog - https://navia.co.in/blog/what-is-risk-reward-ratio-why-it-matters/ • Potential Reward: Difference between target price and entry price. • Example: Buy stock at ₹1000, target ₹1100 → Potential Reward = ₹100. • Potential Risk: Difference between entry price and stop-loss price. • Example: Stop-loss at ₹980 → Potential Risk = ₹20.

  4. Example Calculation Read blog - https://navia.co.in/blog/what-is-risk-reward-ratio-why-it-matters/ • Entry Price: ₹1000 • Target Price: ₹1100 → Reward = ₹100 • Stop-Loss: ₹980 → Risk = ₹20 • Risk-Reward Ratio = 100 / 20 = 5 • This means potential reward is 5 times the potential risk, indicating a favorable trade.

  5. Read blog - https://navia.co.in/blog/what-is-risk-reward-ratio-why-it-matters/ Tips for Using Risk-Reward Ratio • Aim for R:R ≥ 2 for most trades. • Combine with win-rate to calculate expected returns. • Use it to set stop-loss and target levels before entering a trade. • Always adjust position size according to your risk tolerance.

  6. Disclaimer Investment in securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are for illustrative purposes and are not intended as recommendations. Brokerage will not exceed the SEBI prescribed limit. Navia Markets Ltd ,SEBI Registration No.INZ000095034-NSE Member code for CM, FAO & CD: 07708 - BSE Clearing No. for CM, FAO & CD: 6341-MCX Member ID: 45345 NSDL DP ID: IN300378-CDSL DP ID: 12086500-SEBI Registration No. for DP: IN-DP-311-2017-GST Registration number :33AAACM4739R2ZZ-Registered office: Ganga Griha, 4th & 5th Floor, No.9, Nungambakkam High Road, Chennai - 600 034 Email ID: ig@navia.co.in - Contact No: +91 70100 75500 https://bit.ly/naviadisclaimer Read blog - https://navia.co.in/blog/what-is-risk-reward-ratio-why-it-matters/

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