Risk/Reward Ratio
Definition
The relationship between potential loss (risk) and potential gain (reward) on a trade.
Detailed Explanation
Risk/reward ratio compares how much you stand to lose versus how much you could gain on a trade. A 1:2 ratio means risking $1 to potentially make $2. This ratio determines the win rate needed to be profitable - at 1:2, you only need to win 33% of trades to break even. Professional traders typically require 1:2 minimum before taking trades, as it allows profitability even with modest win rates.
Example
Entry at $50, stop at $48 (risk $2), target at $56 (reward $6). R:R = 1:3. You can lose three times and win once to break even.