The risk-reward ratio compares the money you risk on a trade (your stop loss) to the money you aim to make (your target). A 1:2 ratio means risking one unit to make two. A favourable ratio is powerful because it lets a strategy stay profitable even when many trades lose — the winners simply pay for more than the losers.
At 1:2 you only need to win about 34% of trades to break even. At 1:3, roughly 26% — which is why risk-reward often matters more than win rate.
This definition is for educational purposes only and is not financial advice. Trading involves risk.