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What does Risk vs Reward mean in trading?



Risk vs Reward is a principle in trading and investing that refers to the trade-off between the potential returns of an investment and the potential losses.


It suggests that in order to achieve higher returns, investors must also accept a higher level of risk. Conversely, if an investor wants to reduce risk, they must also accept lower potential returns.


When evaluating a trade or investment opportunity, investors will often consider the potential returns against the potential risks. This can involve looking at various metrics such as the Sharpe or Sortino Ratio, as well as the potential for losses in the worst-case scenario.


It's important to note that risk and reward are not directly correlated, meaning that a high-risk investment does not guarantee high returns, and a low-risk investment does not guarantee low returns.


Additionally, different investors might have different risk appetite and therefore what is high risk for one may not be the same for another.


Having a clear understanding of your own personal risk tolerance and investment goals will help you evaluate Risk vs Reward in the context of your own portfolio.


To make good decisions, the investor should try to find a balance between risk and reward. Investing only in low-risk assets might not yield high returns, but taking on too much risk may lead to substantial losses. A well-diversified portfolio can help mitigate risk while still allowing for potential returns.