#RiskRewardRatio In its simplest form, the risk-reward ratio compares the amount you stand to lose if things go wrong (risk) to the amount you could gain if things go right (reward). It’s typically expressed as a ratio, like 1:2 or 1:3. For example, a 1:3 ratio means that for every unit of risk (say, $1), you could potentially gain three units in reward ($3).

In trading, this might look like setting a stop-loss at $10 below your entry price (your risk) while aiming for a profit target $30 above it (your reward). The formula is straightforward:

Risk-Reward Ratio = Potential Risk / Potential Reward