Risk-Reward Ratio
Risk Management
What it means
How much you risk on a trade compared to how much you aim to make. A 1:3 ratio means you risk $1 to make $3.
Example
You buy at $100 with a stop at $95 (risk $5) and a target at $115 (reward $15). The risk-reward ratio is 1:3 -- you can lose three trades in a row and one winner still nets you money.
Mistake beginners make
Beginners set tight stops and far targets to force a "great" 1:5 ratio, but the tight stop gets hit constantly. A ratio only works if both the stop and target are realistic.
Related terms
- Position Sizing — Deciding how many shares or contracts to trade based on how much you are willing to lose, …
- Expectancy — The average amount you expect to make per trade, accounting for both wins and losses. A po…
- R-Multiple — Expressing profit or loss as a multiple of the amount risked. It makes every trade compara…