How to calculate risk reward ratio?

The risk-reward ratio measures the potential profit of a trade relative to the capital risked. To calculate this metric, divide the amount you stand to lose by the amount you expect to gain. The formula is: Risk / Reward = Ratio. For example, if you enter a trade at 100 dollars with a stop-loss at 90 dollars and a take-profit target at 120 dollars, your risk is 10 dollars and your reward is 20 dollars. This results in a 1:2 risk-reward ratio. A ratio of 1:2 means you risk 1 dollar to make 2 dollars. Many traders prefer a ratio of at least 1:2 or 1:3 to ensure that winning trades compensate for potential losses. A higher ratio allows for a lower win rate while still maintaining profitability. If your ratio is 1:1, you must win more than 50 percent of your trades to cover transaction costs and commissions. Risk management is essential because trading involves significant financial risk. No ratio guarantees success, as market conditions change rapidly. Always account for slippage and transaction fees when calculating your potential exit points, as these costs can reduce your net reward and alter your actual risk-reward profile.