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The Risk-Reward Ratio (RRR) is a key concept in trading that helps you measure how much you're risking compared to how much you could potentially gain.
Formula:
Risk-Reward Ratio = Potential Loss / Potential Gain
For example:
If you risk $100 to potentially earn $300, your risk-reward ratio is 1:3.
That means for every dollar you risk, you could earn three.
Why it matters:
Helps you make strategic decisions
Keeps emotions out of trading
Even if you're right only 40-50% of the time, a good RRR can keep you profitable
Pro tip:
Many traders aim for at least a 1:2 or 1:3 ratio to make trades worth the risk.