What is Risk to reward?

Risk to reward.

 Risk to reward (also called risk-reward ratio) is a concept used in investing and trading to measure and compare the potential profit of a trade or investment relative to the potential loss.

🔍 Definition:

Risk to Reward Ratio = Potential Loss / Potential Gain

  • Risk is how much you're willing to lose if the trade goes against you.

  • Reward is how much you stand to gain if the trade works in your favor.

💡 Example:

Suppose you're buying a stock at $100:

  • You place a stop-loss at $95 (risking $5).

  • Your target price is $115 (potential gain is $15).

So the risk to reward ratio is:

bash
Risk/Reward = $5 / $15 = 1:3

This means you’re risking $1 to potentially make $3.

✅ Why It Matters:

  • Helps traders manage risk and assess if a trade is worth taking.

  • Many traders aim for a ratio of 1:2 or 1:3 or better, meaning the potential reward is 2 or 3 times the risk.

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