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The reward-to-risk ratio measures a trade’s expected returns against its predetermined risk of loss.

The ratio is computed by dividing the profit that a trade is expected to yield by the loss that the trade may incur.

For instance, let’s say that trader ABC expects to make $100 by buying EUR/USD. If he places his in such a way that he stands to lose just $25, the trade’s reward to risk ratio is 4:1 (100 / 25).