Trading glossaryReviewed 16 July 2026
Definition
A risk-reward ratio compares a trade’s planned downside to its planned upside using defined entry, invalidation, and target prices before entry.
In market context
The ratio is a planning input, not an expected return, because neither the stop nor target is guaranteed to execute or be reached. A strategy with larger potential reward can still lose overall if its success rate, costs, slippage, and tail losses are unfavorable. Consistent calculations should use realistic execution assumptions and be evaluated across many trades rather than used to justify one appealing setup.
Source
Use the primary source for fuller regulatory or market context.