what is the risk reward ratio 
the risk reward ratio also known as the risk return ratio marks the prospective reward an investor can earn for every dollar they risk on an investment many investors use risk reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns a lower risk return ratio is often preferable as it signals less risk for an equivalent potential gain consider the following example an investment with a risk reward ratio of 1 7 suggests that an investor is willing to risk 1 for the prospect of earning 7 alternatively a risk reward ratio of 1 3 signals that an investor should expect to invest 1 for the prospect of earning 3 on their investment traders often use this approach to plan which trades to take and the ratio is calculated by dividing the amount a trader stands to lose if the price of an asset moves in an unexpected direction the risk by the amount of profit the trader expects to have made when the position is closed the reward 