Risk-Reward Ratio

The risk-reward ratio compares the potential profit of a trade to its potential loss, helping traders evaluate whether a trade is worth taking. A 1:2 risk-reward means risking $1 to potentially make $2. Professional traders typically seek ratios of at least 1:2 or 1:3. The ratio is calculated by dividing the distance from entry to target by the distance from entry to stop loss. Higher ratios allow traders to be profitable even with lower win rates. However, higher reward targets may have lower probability of success. Balancing risk-reward with win rate probability is crucial for developing a positive expectancy system.