The risk-reward ratio is a key concept in trading and investing, helping you evaluate potential gains versus potential losses. It's calculated by dividing the potential profit by the potential loss.

Risk-Reward Ratio Formula

Risk-Reward Ratio = Potential Profit / Potential Loss

Example

Potential Profit: $100

Potential Loss: $50

Risk-Reward Ratio: 2:1

Interpretation

A higher risk-reward ratio indicates a more favorable trade, as potential gains outweigh potential losses. A lower ratio suggests a riskier trade. Traders often aim for a risk-reward ratio of at least 2:1 or higher to ensure potential profits justify the risk taken.#RiskRewardRatio