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 stop-loss and profit target set before the trade goes on. It's conventionally written reward-first — a 2:1 ratio means the potential reward is twice the risk — so a trade risking $4 per share to make $8 is 2:1, and risking $4 to make $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 you can be wrong more often than right and still come out ahead, as long as losses stay capped at the stop and gains get captured near the target. Traders often check the math against the actual chart too, since a nearby support or resistance level may be a more realistic stop than an arbitrary multiple of risk.