Risk-to-Reward (RR) Ratio measures how much risk a trader is taking on compared to the potential profit. A favorable ratio means the potential reward outweighs the possible loss. Traders often set stop losses and take profits based on a predefined ratio to ensure consistency, discipline and long term gains.
Example:
A trader risks $100 on a trade with a target profit of $300. The risk-to-reward ratio is 1:3, which is generally considered attractive.