Understanding Risk-Reward Ratio More Deeply

For beginners trading commodities, one thing that needs to be thoroughly understood is the Risk-Reward Ratio. This number compares how many units of profit we stand to gain if we risk losing 1 unit. For example, if we plan to enter a trade on $GLD at 367.13 and set a Stop Loss at 365.77 (meaning we risk approximately 1.36 points), but we expect the price to reach 372.8912 (meaning there's a chance to gain approximately 5.76 points), then our Risk-Reward Ratio would be around 1:4.23, which is considered quite good. Understanding this will help us make better decisions on whether to enter a trade or not, and help manage our portfolio in the long run.