The risk/reward ratio compares how much you stand to lose on a position against how much you stand to gain. Expressed as something like 1:3, it means risking one unit to potentially make three. It frames a trade in terms of what is at stake, not just the hoped-for upside.
The ratio is only half the picture; the probability of each outcome matters just as much. A tempting 1:5 ratio is a poor bet if the chance of success is tiny, while a modest 1:2 can be excellent if the odds are in your favour. Ratio and likelihood have to be weighed together.
Used well, the framing forces you to define your downside before you enter — usually with a stop-loss — and to size the position so the worst case is survivable. Deciding what you can lose before chasing what you might gain is the heart of risk management.
Worked example
Risking $100 to make $300 on a trade is a 1:3 risk/reward ratio.
Related guides
This definition is general education, not investment advice. Markets — especially crypto — are volatile and you can lose money. Please read our disclaimer and see our methodology.