Risk-reward ratio

What does the risk/reward ratio represent?

The risk/reward ratio provides information on the relationship between the expected profit and the risk taken on a trade.

For example, if we enter a share at € 50, the expected price target is € 70 and the stop loss € 45, we have a chance of € 20 profit and a risk of € 5 per share. In this case, the risk/reward ratio is 4:1, with 1 always representing the risk.

The greater the risk/reward ratio, the more lucrative the trade.