Stop loss is the amount of money which you are willing to lose per trade. Take profit is the amount of money which you are willing to receive a profit. In general with forex trading, stop loss & take profit get added to your trades in terms of pips.
For example, If you are bought EURUSD at 1.2510 & you are willing to put stop loss of 10 pips with 20 pips take profit. Then your stop loss will be at 1.2510-0.0010 = 1.2500 & your take profit will be at 1.2510+0.0020 = 1.2530. If market reaches to 1.2500 then you will lose 10 pips else if EURUSD reaches to 1.2530 you will make 20 pips profit.
In forex how much you will make or lose that depends on, how much pip you have earned or lost.
Example, if you buy EURUSD 1 standard lot at 1.2560 and your target is 1.2620 with a stop loss around 1.2530. That means your take profit is 60 pips & stop loss is 30 pips. If market instead of rising fell below your stop loss, then you will lose 30 pips. If the pip value is $10 then you will lose total $300. If the market did reach your take profit, then you will make $600.
Risk reward ratio is the ratio of take profit and stoploss. How much you are risking and how much you are earning for that risk. Risk/Reward ratio is the most important factor in trading. Before placing a trade you need to decide whether taking a trade will be worthy or not. Your reward should be always greater than your risk.
With the example above, the risk-reward ratio is here is 1:2. If you risk 15 pips for 15 pips profit, then your risk-reward ratio will be 1:1. If you risk 15 pips for 60 pips, then your risk-reward ratio will be 1:4.
Your trading account long-term growth highly depends on risk-reward ratios. No can achieve 100% winning rate constantly. Thus if you have 50% winning rate, i.e you win 5 out of 10. Then with 1:2 Risk Reward ratio, you will still make money.
Suppose you have traded 10 pips with an average of 15 pips stop loss & 30 pips take profit. Then with 60% winning rate your net balance wil be, (30*5 times win)-(15*5 times loss) = 75 pips.
With 1:2 risk reward ratio you can reach to break even point even with 33% win rate. Following table shows how risk-reward ratio is associated with break-even point.
Breakeven Point is the area, where you will neither make the profit nor make the loss. Zero point.
Risk Reward Ratio
Minimum Percentage For Breakeven
With the table, you can see higher the risk-reward ratio, the lower winning rate required to reach breakeven. That is the benefit of high quality trading.