#RiskRewardRatio

The risk-reward ratio is a key concept in investing and trading that helps evaluate the potential return of an investment relative to its risk. It compares the amount an investor stands to lose (the risk) if a trade goes wrong to the amount they could gain (the reward) if it goes right. This ratio is calculated by dividing the potential loss by the potential profit.

For example, if a trader risks $100 to potentially gain $300, the risk-reward ratio is 1:3. This means for every dollar at risk, there's a potential reward of three dollars. A favorable risk-reward ratio helps traders make informed decisions and maintain long-term profitability, even if not all trades are successful.

Using this strategy, investors can filter out low-potential trades and focus on opportunities where the reward justifies the risk. Most successful traders aim for a minimum ratio of 1:2 or higher. While the ratio doesn't guarantee profits, it provides a structured approach to managing trades and improving overall financial discipline in investing.