Risk/Reward Ratio

The risk/reward ratio compares the potential profit of a trade to the maximum potential loss, helping traders assess whether a setup is worth taking. A ratio of 1:2 means the trader risks one unit to potentially gain two units. Most professional traders seek setups with a ratio of at least 1:2 or 1:3, allowing them to remain profitable even if they win fewer than half their trades. The risk/reward ratio works hand-in-hand with win rate to determine overall profitability. Consistently applying a favorable ratio is one of the most reliable paths to long-term trading success.