Risk Reward Ratio

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The risk-reward ratio measures the potential profit of a trade relative to its potential loss, helping traders objectively evaluate whether a setup justifies the capital at risk. A trade with a 3:1 risk-reward ratio means you stand to gain three dollars for every one dollar you risk, which allows a trader to be profitable even if they win only a fraction of their trades. Understanding and consistently applying a favorable risk-reward framework is one of the most reliable ways to build long-term profitability as an active trader.