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Define: Reward Risk Ratio

Reward Risk Ratio is a ratio which measure the amount of profit per dollar risked. It is calculated by dividing maximum potential profit against maximum potential loss.

Typically, options traders prefer to trade with a reward risk ratio of 2:1. More aggressive options traders may prefer something up to 4:1. Calculation of reward risk ratio should be done by every options trader prior to every options trade.

Read the full tutorial on Calculating Reward Risk Ratio.