What is a risk-reward ratio?
The risk-reward ratio refers to the expected profit in relation to the risk taken. It tells a trader how much he or she stands to gain from the risk they are taking. For instance, assume that a trader buys a stock for ₹10 and places a stop-loss order at ₹5, with the expectation that the stock price will hit ₹20. It means they are taking the risk of losing ₹5 to make a profit of ₹10. Hence, the risk-reward ratio is 1:2. This ratio helps traders to gauge the risk in any trade and decide whether to take or simply avoid a specific trade.
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