The risk-reward ratio is a ratio that calculates the potential profits and potential losses of a trade. For example, a risk/reward of 1:3 would mean that someone would spend $1, expecting to make a $3 profit on their investment.
However, calculating this ratio in crypto is more difficult due to drastic price fluctuations. Many crypto traders use analytical tools such as technical analysis to see the potential losses and gains.
Determining support and resistance points can help you manage your risk when buying an asset. For example, the price of the ARB token is $1. You determine that ARB is likely to climb to the $1.5 resistance. Meanwhile, you also determine that your loss tolerance is the $0.8 support. This is the calculation of the risk-reward ratio.