What is it?
It’s a way to compare how much you could lose vs. how much you could win in a trade or investment.
Risk: The money you might lose if the trade goes wrong.
Reward: The money you hope to make if the trade goes right.
How does it work?
Imagine you’re placing a bet:
- You risk $5(your stop-loss).
- You aim to make $10 (your profit target).
Your risk-reward ratio here is 1:2
- This means you’re risking $1 to try to make $2
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Why does it matter?
-Good ratio (like 1:2 or 1:3)Even if you lose some trades, winning a few can cover your losses and still make profit.
Bad ratio (like 1:0.5)You’re risking more than you could gain. Over time, this usually leads to losses.
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Simple Rule of Thumb:
Risk less, aim for more.
If you’re risking $1, try to make at least $2 (or more). This gives you a cushion for mistakes.
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Think of it like a game: Would you bet $5 to win $5? Probably not. But betting $5 to win $15?That’s a smarter gamble! 😊
