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Risk-Reward Ratios - Why 1:3 Isn't Always Better

· 6 min read
Karthik
Karthik
Founder, TradeLyser

"Always aim for 1:3 risk-reward"

You've heard this advice everywhere.

But it's wrong.

Let me show you why.

What Is Risk-Reward Ratio?​

Definition: The ratio of potential profit to potential loss

Formula: Risk:Reward = Stop Distance : Target Distance

Example:

  • Entry: ₹1,000
  • Stop: ₹980 (₹20 risk)
  • Target: ₹1,060 (₹60 reward)
  • R:R = 1:3

Simple math.

The 1:3 Myth​

Why Everyone Loves 1:3​

The logic:

  • "I can lose 3 times and still be profitable"
  • "One win covers 3 losses"
  • "It's mathematically sound"

The problem: This ignores win rate.

The Real Math​

Scenario A: 1:3 R:R, 30% Win Rate

  • 10 trades: 3 wins, 7 losses
  • Wins: 3 × ₹60 = ₹180
  • Losses: 7 × ₹20 = ₹140
  • Net: +₹40

Scenario B: 1:1 R:R, 60% Win Rate

  • 10 trades: 6 wins, 4 losses
  • Wins: 6 × ₹20 = ₹120
  • Losses: 4 × ₹20 = ₹80
  • Net: +₹40

Same result!

The key: Win rate matters more than R:R

The Complete Picture​

What Really Matters​

1. Win Rate

  • How often you're right
  • More important than R:R

2. Risk-Reward Ratio

  • How much you win vs lose
  • Important but not everything

3. Trade Frequency

  • How many opportunities you get
  • Affects total returns

4. Position Sizing

  • How much you risk per trade
  • Determines account impact

All four matter together.

Real Examples​

Example #1: The High R:R Trader​

Setup:

  • R:R: 1:4
  • Win Rate: 25%
  • Trades per month: 8

Monthly Results:

  • 8 trades: 2 wins, 6 losses
  • Wins: 2 × ₹80 = ₹160
  • Losses: 6 × ₹20 = ₹120
  • Net: +₹40

Problem: Very few winning trades

Example #2: The High Win Rate Trader​

Setup:

  • R:R: 1:1.5
  • Win Rate: 70%
  • Trades per month: 20

Monthly Results:

  • 20 trades: 14 wins, 6 losses
  • Wins: 14 × ₹30 = ₹420
  • Losses: 6 × ₹20 = ₹120
  • Net: +₹300

Better: More consistent profits

Example #3: The Balanced Trader​

Setup:

  • R:R: 1:2
  • Win Rate: 50%
  • Trades per month: 15

Monthly Results:

  • 15 trades: 7.5 wins, 7.5 losses
  • Wins: 7.5 × ₹40 = ₹300
  • Losses: 7.5 × ₹20 = ₹150
  • Net: +₹150

Good: Steady, predictable

The Optimal R:R Formula​

The Math​

Expected Value = (Win Rate × Avg Win) - (Loss Rate × Avg Loss)

For breakeven: Win Rate × Avg Win = Loss Rate × Avg Loss

Solving for R:R: R:R = Win Rate ÷ Loss Rate

Examples​

60% Win Rate:

  • Loss Rate: 40%
  • Optimal R:R: 60% ÷ 40% = 1:1.5

70% Win Rate:

  • Loss Rate: 30%
  • Optimal R:R: 70% ÷ 30% = 1:2.33

50% Win Rate:

  • Loss Rate: 50%
  • Optimal R:R: 50% ÷ 50% = 1:1

40% Win Rate:

  • Loss Rate: 60%
  • Optimal R:R: 40% ÷ 60% = 1:1.5

Why 1:3 Often Fails​

Problem #1: Low Win Rate​

To make 1:3 work, you need:

  • Win Rate > 25%
  • But most traders can't achieve this consistently

Reality: Most traders have 40-50% win rate

Problem #2: Fewer Opportunities​

High R:R setups are rare:

  • Need perfect conditions
  • Wait longer for setups
  • Miss other opportunities

Result: Lower trade frequency

Problem #3: Psychological Pressure​

High R:R = High Pressure:

  • "This trade must work"
  • "I can't afford to lose"
  • "I need this win"

Result: Poor execution

Problem #4: Market Reality​

Markets don't move in perfect ratios:

  • Targets often not hit
  • Stops often hit
  • Reality ≠ Theory

The Better Approach​

Step 1: Find Your Win Rate​

Track your last 50 trades:

  • How many won?
  • What's your actual win rate?

Example: 30 wins out of 50 = 60% win rate

Step 2: Calculate Optimal R:R​

Formula: R:R = Win Rate ÷ Loss Rate

Example:

  • Win Rate: 60%
  • Loss Rate: 40%
  • Optimal R:R: 60% ÷ 40% = 1:1.5

Step 3: Test Different R:R​

Try these scenarios:

Conservative (1:1.2):

  • Lower pressure
  • More opportunities
  • Steady profits

Moderate (1:1.5):

  • Balanced approach
  • Good opportunities
  • Solid profits

Aggressive (1:2):

  • Higher pressure
  • Fewer opportunities
  • Bigger wins

Step 4: Optimize Based on Results​

Track for 3 months:

  • Which R:R works best?
  • What's your actual win rate?
  • Adjust accordingly

R:R by Trading Style​

Scalping (1:0.8 to 1:1.2)​

Characteristics:

  • High win rate (60-70%)
  • Low R:R acceptable
  • High frequency

Example:

  • Win Rate: 65%
  • R:R: 1:1
  • Result: Profitable

Day Trading (1:1.5 to 1:2)​

Characteristics:

  • Moderate win rate (50-60%)
  • Moderate R:R
  • Medium frequency

Example:

  • Win Rate: 55%
  • R:R: 1:1.8
  • Result: Profitable

Swing Trading (1:2 to 1:3)​

Characteristics:

  • Lower win rate (40-50%)
  • Higher R:R needed
  • Lower frequency

Example:

  • Win Rate: 45%
  • R:R: 1:2.2
  • Result: Profitable

Position Trading (1:3 to 1:5)​

Characteristics:

  • Low win rate (30-40%)
  • Very high R:R needed
  • Very low frequency

Example:

  • Win Rate: 35%
  • R:R: 1:3
  • Result: Profitable

The Psychology of R:R​

High R:R Problems​

1. Perfectionism:

  • "This trade must hit target"
  • "I can't exit early"
  • "I need the full move"

2. Impatience:

  • "When will it move?"
  • "Why is it taking so long?"
  • "I should exit now"

3. Fear:

  • "What if it reverses?"
  • "I can't afford to lose"
  • "This is my only chance"

Lower R:R Benefits​

1. Realistic Expectations:

  • "Small wins are fine"
  • "I'll take what I can get"
  • "Consistency matters"

2. Less Pressure:

  • "I don't need perfect trades"
  • "I can exit early if needed"
  • "There are more opportunities"

3. Better Execution:

  • "I'll follow my plan"
  • "I won't force trades"
  • "I'll be patient"

Advanced R:R Concepts​

Dynamic R:R​

Adjust R:R based on:

Market Conditions:

  • Trending: Higher R:R possible
  • Ranging: Lower R:R needed
  • Volatile: Lower R:R safer

Setup Quality:

  • A+ setup: Higher R:R
  • B setup: Lower R:R
  • C setup: Skip trade

Personal State:

  • Confident: Higher R:R
  • Stressed: Lower R:R
  • Tired: Lower R:R

Partial Exits​

Instead of fixed R:R:

Exit 50% at 1:1 Exit 30% at 1:2 Let 20% run

Benefits:

  • Lock in profits
  • Reduce pressure
  • Let winners run

Trailing Stops​

Start with 1:1 R:R Move stop to breakeven at +1R Trail stop as price moves

Result: Often achieve 1:2+ R:R

The Bottom Line​

Don't chase 1:3 R:R.

Instead:

  1. Find your win rate
  2. Calculate optimal R:R
  3. Test different ratios
  4. Optimize based on results

Remember:

  • Win rate > R:R
  • Consistency > Perfection
  • Profits > Ratios

The best R:R is the one that works for YOU.

Take Action Now​

This Week:

  1. Calculate your actual win rate (last 50 trades)
  2. Determine your optimal R:R
  3. Test it with small position sizes

This Month:

  1. Track R:R vs win rate
  2. Find your sweet spot
  3. Optimize your approach

This Quarter:

  1. Refine your R:R strategy
  2. Measure improvement
  3. Share results with community

👉 Calculate Your Optimal R:R in TradeLyser
👉 Download: R:R Calculator
👉 Next: Building a Trading Strategy from Scratch

What's your optimal R:R ratio? How did you find it? Share below.