In trading, this usually refers to the ratio of the potential profit on a trade to the potential loss on that trade. In backtesting terms (especially for a strategy’s aggregate performance), risk-reward ratio can mean the ratio of the average winning trade to the average losing trade. For example, if the average win is $200 and average loss is $100, the risk-reward ratio is 2:1. A higher ratio indicates the strategy tends to make more on winners than it loses on losers. It’s important to interpret risk-reward alongside win rate; a strategy could have a high risk-reward ratio but a low win rate, or vice versa, and either can be viable if balanced correctly.

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