Risk-Reward Ratio
A metric that compares the potential loss to the potential gain of an investment or trade.
Explained Simply
The risk-reward ratio measures how much you stand to gain versus how much you could lose. A ratio of 1:3 means you risk $1 to potentially earn $3. Traders typically look for setups with at least 1:2 or 1:3 risk-reward. In crypto, this often means setting a stop-loss below support and a take-profit target at the next resistance level. Good risk management means you can be profitable even if less than half your trades win, as long as winners are larger than losers.
Example
Buying ETH at $3,000 with a stop-loss at $2,800 (risk: $200) and target at $3,600 (reward: $600) gives a 1:3 risk-reward ratio.
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This content is for educational purposes only and does not constitute financial, tax, or legal advice. Always consult a qualified professional for advice specific to your situation.