Understanding Risk-Reward Ratio in Trading
The risk-reward ratio is a fundamental concept in trading that helps investors measure potential profit against possible loss. It’s calculated by dividing the expected profit by the potential risk on a trade. For example, a 1:3 ratio means you're risking $1 to potentially earn $3.
A favorable risk-reward ratio ensures that even if some trades fail, the successful ones can still keep you profitable overall. Smart traders use this tool to plan trades wisely, stay disciplined, and protect their capital in the long run.
In short, mastering risk-reward ratios is key to consistent and strategic trading success.