The risk-reward ratio in trading refers to the relationship between the potential profit and potential loss of a trade. It's a crucial concept for traders to understand as it helps them assess the potential profitability of a trade relative to the potential downside. Typically expressed as a ratio (e.g., 2:1), it indicates how much profit a trader expects to make compared to the amount they are willing to risk. For example, a risk-reward ratio of 2:1 means the trader is willing to risk $1 to potentially make $2. Traders often aim for a favorable risk-reward ratio to ensure their potential profits outweigh their potential losses, helping to manage risk and maximize returns over time.