Risk vs reward forex

As such, the RRR of this trade is 1: 5. If you make a trade like this and won the first one, you would have pips profit in your bag. It would take 5 consecutive losses to lose all the pips. Still, this would only take your earned profits without touching your capital. If this trend happened ten times, you would have 2, pips of profit despite making more losses than profits.

This is what has kept me winning and not worrying about making consecutive losses because I am sure that when I score a winner, it will cover all the losses and leave me profitable. Read this very carefully before you blindly apply the RRR. If you just decided to apply a RRR to random trades without the proper market analysis, you will be gambling and that might see you make serious losses and get your account blown. You MUST know how to calculate and spot the trades that have the potential to offer more reward than risk.

This is the most-traded concept in Forex.

Unfortunately, it is mostly done the wrong way as RRR is usually ignored. The figure below shows you how to calculate the RRR of a trade before pulling the trigger. In short, the RRR for this trade would be 1: 2. In this case, we call it a good trade.

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However, if the RRR was below , it would not be advisable to take it. Use any strategy that you feel works for you, but make sure to look only for trades that let you place the TP further than the SL. If you understand the Waves principle, then you can easily understand this diagram. Just use any strategy that you like. As you can see, my SL is at 15 pips. In this case, the TP is 90 pips away. If you have been undergoing the stress of making consecutive losses and ending up on the losing side, your time to rise has come.

You only need to apply this very simple RRR method and the graphs will turn upwards. Incorporate the approach and remember to always take the trades that promise higher Reward than the Risk. Personally, I never take any trade that offers a RRR below Again, keep in mind that the higher the Risk to Reward Ratio a trade offers, the fewer winning trades you need in order to remain profitable. Trading leveraged products puts you at risk of losing part or all of your money.

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About Us. Tony Post Contents [ hide ]. My Early Days of Trading. The Risk to Reward Ratio.

• Reward-to-Risk Ratio.
• How to find the best Risk and reward ratio in FX!
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• Forex risk reward ratio strategy - how it works?

So, what is this RRR? Applying RRR. Calculating RRR in your trading. Ultimate Guide For Beginner. Latest Release.

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Will The U. Dollar Rise Or Drop? On the other hand, if your trading strategy is capable of delivering trades with a risk to reward ratio, but you usually close the trade once your profit reaches only two times of your initial stop loss, then you are always leaving money on the table. Hence, you should spend a lot of time back testing your strategy and try to find out the realistic average profit your trading strategy makes on each trade relative to the stop loss it requires.

Only then can you can properly understand the relationship between risk and reward and successfully conduct a forex risk reward analysis for your particular trading strategy. In this section we will dive into the mechanics of how to calculate risk reward ratio. The formula for computing risk vs reward ratio is relatively straightforward. If you risk 50 pips on a trade and you set a profit target of pips, then your effective risk to reward ratio for the trade would be Your risk 50 pips for a reward pips would equal: risk reward ratio.

Also in real trading, you need to consider the spread charged by your Forex broker to conduct the risk and reward analysis effectively. If you do not pay attention to the spread, you will end up using a risk to reward ratio for your trades that is not completely accurate.

For example, if you are a scalper who likes to risk a maximum of five pips per trade and aim to gain around ten pips from each of your trades, and think you are achieving a risk to reward ratio, then think again!

How To Use The Reward Risk Ratio Like A Professional

So essentially based on this example, Your risk 7 pips for a reward 8 pips would equal: risk reward ratio. You do not need to be a math genius to figure out that it would require a lot higher win rate to compensate for this huge risk to reward ratio difference due to spreads, right? While the effect of spreads is most severe for scalpers and day traders, this effect generally gets more diluted for swing traders and position traders that tend to trade on higher timeframes. Such a high spread could easily distort the actual risk to reward ratio of your trades beyond recognition, especially if you set narrow stop losses and profit targets while scalping.

If we calculate the risk to reward ratio of a trade that has pips stop loss and a pips profit target, this time, our calculation should yield an entirely different outcome. As you can see, the spreads charged by your broker would have had a minuscule effect on the RVR calculation, as the risk to reward of this trade would remain pretty high, at 1: 1.

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This is one of the major advantages of higher time frame trading. Hence, if you are a swing trader or position trader instead of a scalper or short term trader, the negative effects of spread as a transaction cost would be much lower to your bottom line. Aside from understanding the overall risk to reward ratio of your trading strategy, you also need to figure out the impact of win rate, which is an integral part of the risk to reward ratio analysis.

If you already know the historical risk to reward ratio of your trading strategy from back testing, there is a simple formula you can apply to figure out what kind of win rate you will need to maintain to remain profitable in the long run. The formula to find minimum win rate is following:. For example, if you know that your trading strategy has an expected risk to reward ratio of from extensive back testing, then plugging this into the formula would yield the following outcome:.

If you already know the win rate of your system from extensive backtesting, but yet to figure out what kind of risk to reward ratio you will require to remain profitable in the long run, then you can apply another formula to find out the necessary risk to reward ratio. The formula to determine required minimum risk to reward ratio is following:. So, to remain profitable in the long run with this trading strategy, you need to maintain a risk to reward ratio of at least As you can see by now, the win rate of your trading strategy plays a vital role in the overall risk reward equation.

Manually calculating risk to reward ratio could seem like a tedious process at times. You can use a simple calculator to find the effective risk to reward ratio of your trades, or you can use several tools to simplify the process , including a Microsoft Excel sheet or an online FX risk reward calculator. However, beyond that there is a much easier way to do the RVR calculation if you are using a charting software like MetaTrader 4.

In addition, there is a built-in tool in most charting softwares, including MetaTrader 4 , namely, the Fibonacci retracement tool that you can use to effectively calculate the risk to reward ratio of your trades. While most Forex traders use the Fibonacci retracement tool to calculate the Fibonacci levels of a significant price swing, with slight modification to the retracement levels, you can use it to visually identify the risk to reward ratios as well.

In MetaTrader 4, you can add custom extension levels like 2, 3, 4… and so on. Please note that these levels would not represent Fibonacci ratios and only serve as a visual reminder about the potential risk to reward price levels of the trade you are about to take.