Risk Management
Risk-Reward Ratio
Quick Definition
The relationship between potential loss (risk) and potential gain (reward) on a trade, expressed as a ratio.
In Plain English
Smart traders don't need to be right most of the time—they need good risk-reward. If you risk $1 to potentially make $3 (1:3 ratio), you only need to be right 25% of the time to break even.
Example
Entry at $100, stop loss at $95 (risking $5), target at $115 (potential gain of $15). Risk-reward ratio: 1:3.
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