Risk and reward
What you learn in 3 minutesA trader in Pune once won six trades out of ten and still ended the month with less money. He had risked ₹2,000 on each winner-to-be and let each loss run to ₹4,000. The ratio between what you risk and what you aim to make decides how often you must be right. This lesson shows that arithmetic in rupees on USD/INR, and why the ratio you can actually get is not fixed.
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.
The mistake 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.