Risk-Reward Ratio

The relationship between the potential loss and potential gain on a trade, expressed as a ratio. A trade risking $100 to make $300 has a 1:3 risk-reward ratio. Most professional traders insist on a minimum of 1:2 risk-reward before entering a position, because a favorable ratio allows a trader to be profitable even with a win rate below 50%. Calculating risk-reward before entry, based on stop-loss and target levels, is a fundamental discipline that separates structured trading from gambling.