Risk/Reward Ratio

Traders set risk:reward ratios to determine how much money they are prepared to put at risk (i.e. lose) for every dollar of profit. A 1:5 risk: reward ratio means a trader puts a dollar at risk to earn five dollars. In and of itself, the risk:reward ratio does not provide any indication of future profits. That depends entirely on how many trades actually pay off. A low risk:reward ratio can be more profitable than a high ratio if trades in the latter case end up losing money. Where a trader sets his risk:reward is just a signal of the level of risk aversion or risk-seeking behaviour.