The potential loss to the stop compared with the potential gain to a stated target.
How it works
The ratio compares the planned loss to a stated profit objective. It is meaningful only when entry, stop, target, costs, and probability assumptions are explicit.
Example
Risking 2 per share to pursue a 6 gain gives a stated risk-to-reward ratio of 1:3 before fees and slippage.
Limitations
A favourable ratio does not reveal the likelihood of success. Targets may not be reached, stops may slip, and repeated small losses can still accumulate.
Evidence LedgerHow this insight was built
Human reviewedThesis being tested
This definition explains Risk–Reward Ratio accurately, with its practical use and material limitations.
Key assumptions
- The named calculation or convention is stated where definitions vary.
- The example is illustrative and not a forecast or recommendation.
What could invalidate the view
- A different market, instrument, jurisdiction, or methodology may use the term differently.
- The cited authority may revise its guidance or terminology.
- Editorial ownership
- Market Master · reviewed
- Approval state
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- Evidence currency
- Current evidence window
- Source coverage
- 2 documented sources
Sources used for this insight