Glossary · Risk & Strategy
Risk/reward ratio
Potential loss compared to potential gain on a trade.
Risk/reward compares how much you stand to lose if the plan fails versus how much you aim to make if it works. A 1:2 risk/reward means you risk $1 to potentially make $2.
Traders define risk with a stop and reward with a target before entry. Favorable math does not guarantee profit — win rate still matters — but it forces intentional exits instead of wishful holding.
Example
You buy at $50, set a stop at $48 (risk $2), and target $56 (reward $6). That is a 1:3 risk/reward setup.