Risk/Reward Ratio Definition
In many cases, market strategists find the ideal risk/reward ratio for their investments to be approximately 1:3, or three units of expected return for every one unit of additional risk.
What Does the Risk/Reward Ratio Tell You?
The risk/reward ratio helps investors manage their risk of losing money on trades. Even if a trader has some profitable trades, he will lose money over time if his win rate is below 50%. The risk/reward ratio measures the difference between a trade entry point to a stop-loss and a sell or take-profit order. Comparing these two provides the ratio of profit to loss, or reward to risk.