#### Risk reward ratio

The last two illustrations are simulated price movements that shows how it influences our accounts trading two differently priced stocks at a given number of shares. At this point you might already be thinking that lower priced stocks are the way to go for a higher return, If you understand its risk/reward ratio then nothing is wrong trading it. Thinking of a rise from \$3.00 to \$20.00 should be tempting enough to jump in to that stock at sight. Say, you have \$20,000 of investment money, which is cash you wouldn't need for daily or future expenses. Out of that \$20,000, you decided that you could afford to lose \$2,500 which is obviously your risk and should get you about 833 shares at \$3.00. Now, you have already accepted the possibility that you could lose \$2,500, you wouldn't be worried as much as actually utilizing the entire \$20,000 buying that \$3.00 stock, you can increase or decrease the amount of risk as long as it is within your comfort zone. If it does shoot up to \$20.00 a share, it will turn that \$2,500 into \$16,600. Pretty impressive, that is a 560% gain and even if your target price is only \$10.00, it would still deliver 233.20% turning it to \$8,330 at a profit of \$5,830. Dividing that profit with your risk is the Risk/Reward ratio of 1:3.3 for a \$3.00 to \$10.00 movement.