#RiskRewardRatio The risk-reward ratio is a fundamental concept in trading and investing that compares the potential profit of a trade to its potential loss. It is calculated by dividing the amount an investor stands to lose if the price moves unexpectedly (risk) by the amount they expect to gain when the position is closed (reward). For example, if a trader sets a stop-loss order $10 below the entry price and a take-profit order $20 above, the risk-reward ratio would be 1:2, meaning the trader risks $1 to potentially gain $2.