Risk and psychology
Risk-reward ratio
Definition
The risk-reward ratio compares what you stand to lose with what you aim to gain. Buy at $100 with a stop at $98 and a target at $104, and you risk $2 to aim for $4, a 1:2 ratio. The ratio only helps if the target is realistic, with no strong level standing in the way.
Example
Say you buy at $60.00 with a stop at $59.00 and a target at $63.00, a 1:3 ratio on paper. If resistance sits at $61.20, a realistic target is closer to $61.10, which makes the trade about 1:1.1. Moving the target further out improves the ratio only on paper, not the odds of reaching it.
Hypothetical numbers, for illustration only.
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