RISK: REWARD PROPORTION IN FOREX TRADING
The risk: reward proportion is an interesting topic when considering forex trading. There are some forex traders who suggest that we must not trade at any point of time, with a risk: reward proportion less than that of 1:3 or 1:12 or 1:1.5 etc. The risk: reward proportion is the comparison between the percentage of reward you get towards the amount of risk or effort you make for the trading. This article provides some small instances for calculating the reward: risk proportion in order to make it easy for users to comprehend.
If we have a risk: reward proportion as 1:2, it indicates that for every trade unit we risk ourselves, we should expect the return of investment or profit as 2 units. This can be also said in terms of jargons in forex trading as while trading with 40 pip stop, one can expect a gain of minimum 80 pips in order to get a risk: reward ratio of 1:2. If the risk: reward ratio is 1:3, then we can expect a profit of 120 pips while trading with a 40 pip stop.
The risk: reward proportion is a crucial factor which determines the success rate of the forex trader in his trading. If we have a forex trading system, where there is a fixed 40 pip stop and a fixed gain of 80 pips on all forex trades, then our risk: reward ratio will be 1:2. If we are fortunate enough to gain success on 40 percent of our trades, then we shall become a highly profitable trader in the long term. So, it will not be a big problem. But if our success rate is less than thirty five percent, then we shall begin to get problems in the long run.
Where traders can have trading methodologies which use 20 pip stops and ten pip target on every forex trade, the risk: reward proportion will be negative and as 2:1 which is considered by traders as way to ruin the trade completely. But if there is some good success rate with the same method as high as 70 percent, then the trader would have a profitable business overall. There are many successful forex traders who trade in similar way.
Some forex trader have very high risk: reward proportion as 1.5, by using methods where for a 20 pip stop, the profit will be 100 pips for every trader. The success rate is around twenty percent in order to become a successful trader. The understanding of risk: reward proportion is important to have a good knowledge about success rate in trading and to become a profitable trader in long term.
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