What is Risk-Reward Ratio?

Risk-reward ratio is a measure that compares the potential profit of a trade to its potential loss. It helps traders evaluate whether a trade is worth taking and is fundamental to long-term trading success.

Calculation

Basic Formula

• Risk = Entry Price - Stop Loss
• Reward = Take Profit - Entry Price
• Ratio = Potential Reward / Potential Risk

Common Ratios

• 1:1 (Neutral)
• 1:2 (Basic profitable)
• 1:3 (Aggressive profitable)
• 2:1 (Higher risk)

Trading Application

Strategy Integration

• Minimum ratio requirements
• Position sizing adjustment
• Trade filtering
• Portfolio management

Best Practices

• Consider win probability
• Account for market conditions
• Adjust for volatility
• Factor in trading costs

Related Terms

• Position Sizing
• Stop Loss
• Take Profit
• Risk Management