A risk-reward ratio is a fundamental concept in trading and investing that helps traders assess the potential profitability of a trade relative to the risk they are willing to take. The ratio compares the amount of risk a trader is willing to accept (the possible loss) with the potential reward (the possible gain). Understanding and applying risk-reward ratios is essential for effective risk management and long-term success in the markets.
What is the Risk-Reward Ratio?
The risk-reward ratio is calculated by dividing the potential profit by the potential loss on a trade. For example, if a trader is risking $100 on a trade with the potential t...