Risk management · Glossary
Risk/reward ratio
A comparison of potential loss with potential profit for a setup.
Definition and explanation
The risk/reward ratio compares the planned loss if a stop is reached with the planned gain if a target is reached. A 1:2 risk-to-reward setup means the potential reward is twice the defined risk, before fees, slippage and execution differences. The ratio alone says nothing about the probability of success.
Example
A setup risking $10 to target $20 has a 1:2 risk-to-reward ratio, assuming both levels are executed as planned.
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