Risk to Reward Ratio in Forex Trading
As I said in the previous article, risk is the amount of
money that you might lose if your trades hits your stop loss order.
Every time you place a trade, your expected reward should be
greater than your risk. For example, if you are risking 10 dollars in a trade,
your expected reward can be around 20 or 15 dollars.
If you are risking 10 dollars and you expect a reward of 20
dollars, that is a risk to reward ratio of 1:2
This means that whenever you place a trade, your take profit
order should be in a level that ensures you more reward than what you have
risked.
This gives you an edge whenever you enter in a trade.
However, setting a very large risk to reward ratio will negatively affect your winning rate, which is also very important.
So you should avoid very huge risk to reward ratios like 1:3 because your winning rate will be very low.
Remember, you only make money after winning a trade.
Even with a winning rate of only 50% and a risk to reward ratio of 1:1.5, you will make money in the long-run.
