Risk/Reward Ratio is a measure used to evaluate the potential return of an investment compared to the risk taken. In trading, it helps investors assess whether a trade is worth the risk based on the expected profit versus the possible loss.To calculate this ratio, you divide the potential profit by the potential loss. For example, if you aim to gain $200 on a trade but your maximum loss is $100, the risk/reward ratio is 2:1. This indicates that for every dollar at risk, you stand to make two dollars in profit.Investors often look for a favorable risk/reward ratio, typically aiming for ratios such as 2:1 or 3:1. A higher ratio suggests a more attractive investment, as it implies greater potential rewards for the amount risked. Understanding this ratio is essential for making informed trading decisions and managing one’s portfolio effectively. By analyzing risk and reward, investors can strategize better and minimize losses while maximizing potential gains.