The risk-reward ratio in trading is the money you’re risking compared to your possible gain. To calculate the ratio on a particular trade, take the capital you’re laying out (your risk) and compare it to the profit you could make (your reward).
For example, if the max loss on a position is $200 based on where you place stops and the max profit is $800 based on where you place limits, the risk-reward ratio is 1:4.
Many traders prefer a risk-reward ratio of 1:3 or higher (so, 1:3, 1:4, 1:5, etc.). However, the higher the ratio, the greater the chance that the market will hit your max loss before your max gain.