Risk–reward

A risk–reward ratio compares the amount you plan to risk with the potential reward. Risk is written first and reward is written second.

In this example, the entry is $100, the stop-loss is $95, and the take-profit is $110. This gives $5 of planned risk per share and $10 of potential reward. Start with $5:$10. To simplify the ratio, divide both amounts by the largest number that divides them evenly. Here, that number is $5, so the ratio becomes 1:2.

A 1:2 ratio means the potential reward is twice the planned risk. Risk–reward alone does not make a strategy profitable. The win rate and trading costs also affect the result.

Position quantity changes the money at risk and the potential reward. With ten shares, $5 risk per share becomes $50. The $10 reward per share becomes $100. Both sides increase by the same factor, so the ratio remains 1:2.

Use the same process for any position. Calculate the risk and reward per share, write risk first, and simplify both sides by the same number. The exercises use new values so you can apply the process yourself.