What Is Risk-Reward Ratio? Meaning & Example
Definition
The risk-reward ratio compares how much you could lose on a trade with how much you could gain. Many traders look for setups where potential reward is at least twice the risk.
Related terms
A stop-loss is an order that closes a position automatically if price moves against you to a set level. It helps limit losses, though fast markets can cause fills worse than the stop price.
Take-Profit OrderA take-profit order closes a position automatically once price reaches a target level. It locks in gains without needing to watch the market constantly.
Position SizingPosition sizing is deciding how much money to put into a single trade or investment. Good sizing limits the damage any one loss can do to your account.
What is Risk-Reward Ratio?
The risk-reward ratio compares how much you could lose on a trade with how much you could gain. Many traders look for setups where potential reward is at least twice the risk.
Can you give an example of Risk-Reward Ratio?
Risking $100 to a stop-loss for a potential $300 gain gives a 1-to-3 risk-reward ratio.