What is Best Risk Reward Ratio Forex Trading

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Slide 1

What is Risk Reward Ratio in Forex Trading

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Index What is a Risk: Reward Ratio? Use a Risk Reward Ratio Types of Risk Reward Ratio

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What is a Risk: Reward Ratio? The risk-reward ratio is simply a calculation of how much you are willing to risk in the trade, versus how much you plan to aim for as a profit target. To keep it simple, if you were making a trade and set your take profit at 20 pips, your risk-reward ratio would be 5:20 or 1:4. You are risking your five pips for the chance to gain 20 pips.

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Use a Risk Reward Ratio The basic theory for the risk-reward ratio is to look for opportunities where the reward outweighs the risk. The higher the possible rewards, the more failed trades your account can withstand at a time. Think about it this way, and if you were to use the example above and have a successful trade, it buffers you against four losing trades with the same ratio.

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The idea of using an excellent risk-reward ratio is to put the odds in favour. If you consistently did the 5:20 ratio, you could lose half of your trades and still make a fair profit. Typically, risk: reward is beneficial when the price is near important support or resistance.

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Example: If EUR/USD is in a downtrend and price has delayed near resistance and could be posting the lower high, the risk: reward would likely favour a sell trade with a smaller protective stop above the entry and larger take profit in the direction of the trend.

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Types of Risk Reward Ratio The type of risk-reward ratio that traders should use depends on the type of trader you are and the market requirements. It would be ideal if you could ever find trades that had high rewards and low risk, but what you might find in actuality could be very different.

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Its frowned on to have a risk that is larger than the reward, but if the market is volatile, it might make sense. The point of having a stop loss is not only to protect capital but also to stop your trade once it no longer makes any sense. Sometimes the point where the trade stops making some sense is much farther from the opening market price than safe exit.

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When it comes down to it, it is up to you as a trader to figure out what type of risk-reward ratio you want to use. You should try to avoid having your risk be bigger than your reward, particularly if you are a beginner, but no particular ratio works for all traders. The important thing is that you use a ratio that makes sense for your trading style and market conditions.

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Thank You

Summary: The risk reward ratio forex is simply a calculation of how much you are willing to risk in the trade, versus how much you plan to aim for as a profit target.

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