Understanding the Risk-Reward Ratio in Practice

It's easy to preach 'risk-reward,' but what does it actually mean when you're looking at a trade? Simply put, it's the potential profit of a trade divided by the potential loss. If you're eyeing $MATIC at current levels of $0.2826, and your analysis suggests a potential move to $0.30 but you'd cut it if it dropped below $0.27, your risk is $0.0126 ($0.2826 - $0.27) and your reward is $0.0174 ($0.30 - $0.2826). That's a 1.38:1 reward-to-risk ratio. The trick, of course, is that your 'potential profit' and 'potential loss' are based on your analysis, and markets have a funny way of not always agreeing with our best-laid plans.