The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results.

Risk reward ratio definition

The risk-to-reward ratio evaluates the level of potential downside to an investment, compared to the potential gains.

Risk reward ratio definition

The risk-to-reward ratio evaluates the level of potential downside to an investment, compared to the potential gains.

While different strategies form different ratios, the general rule is a risk-to-reward ratio of over 1.0 means the possible risk is greater than the possible reward, and anything below 1.0 means the possible profits are greater than the potential risk.

Stop-loss orders and derivatives allow investors to manage the risk-to-reward ratio. Using a stop-loss order, the risk is calculated to be the difference between the price paid for the investment versus the stop-loss order. This figure is then compared to the profit target set by the investor, calculated by the difference between the price paid for the investment and the anticipated profit.

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