What is risk-reward ratio?
Also known as: R multiple, Reward-to-risk
Definition
The risk-reward ratio compares how much a trade risks to how much it aims to make.
A trade risking $500 to target $1,500 has a 1:3 risk-reward ratio. At 1:3, you can be wrong on most trades and still come out ahead, provided the losses stay at their planned size.
The ratio is only as honest as the stop behind it. A target that assumes you will never be stopped out is not a plan.
Related terms
General education only. Not financial advice.