The ratio of potential loss (to stop) versus potential gain (to target), used to evaluate whether a trade setup is worth taking.
A 1:2 risk/reward ratio means risking one unit to make two. At this ratio, a strategy only needs to win one-third of trades to break even before costs. Higher ratios reduce the required win rate but often come with lower probability setups.
Defining risk/reward before entry imposes discipline and helps traders avoid the common mistake of holding losing trades while cutting winning ones short.