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Risk/reward ratio

The amount you stand to gain compared with the amount you risk.

Risk & PsychologyBeginner

Definition

Risking $100 to make $200 is a 1:2 ratio. Many traders require at least 1:2, but the right ratio depends on how often the setup wins: a lower win rate needs a larger payoff.

Formula

Risk/reward = (target - entry) / (entry - stop)

Watch out for

A good ratio on paper means little if the target is unrealistic or the stop is too tight.

Example

Hypothetical exampleEntry at $50, stop at $48 and target at $56 risks $2 to make $6, a 1:3 ratio.

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