In common trading usage, risk/reward compares the loss planned before entry with the potential gross gain. Written as 1:2, it means risking one monetary unit to seek two.
What it does not say
The term is used inconsistently: some sources refer to payoff sizes, while others include probabilities. A trader should therefore state both the order and the calculation used. Cyclepedia uses risk:reward for the planned payoff-size comparison.
A high ratio is not automatically a good trade. It does not say how likely the target is, whether the stop will fill at its price, or what fees and slippage will do to the result. After closing the trade, the realized outcome is better recorded as an R-multiple. See Risk/reward ratio for formulas and examples.
Sources
- CFTC, Futures Glossary — records the probability-based use of the term and its role in comparing trades.
- CME Group, Position and Risk Management — explains why capital at risk must fit account size and risk profile.