Risk/Reward Ratio

The risk/reward ratio compares how much a trade stands to gain against how much it stands to lose, based on a predetermined stop-loss and profit target set before the trade is placed. Despite the name, it's conventionally expressed with the reward figure first — a 2:1 ratio means the potential reward is twice the risk — so you'll also see the same math called a reward-to-risk ratio. A trade risking $4 per share to potentially gain $8 per share has a 2:1 ratio; risking $4 to potentially gain $12 is 3:1. A consistent 2:1 ratio doesn't require winning most trades to be profitable overall — the breakeven win rate at 2:1 is just over 33%, meaning a trader can be wrong more often than right and still come out ahead, as long as losses are actually capped at the stop and gains actually captured near the target. This is why traders often discuss risk/reward alongside win rate rather than win rate alone. A ratio based purely on math is often refined against the actual chart, since a nearby resistance or support level may be a more realistic stopping point than an arbitrary multiple of the risk.