The Secret of Successful Trading Is Risk to Reward Ratio
INTRODUCTION: I am so proud to write about the risk to reward ratio on this forex community. I am proud because it will help more traders, not even for the contest alone or what it is going to fetch, but to help other traders to see the brighter light/side of trading, and devise a better means of trading, managing and protecting their trading at the same. There are lots of traders that has come across my path in my more than ten years of trading career, there are more challenges that has been seen, more argument has been made, and lots of reality has been devised. This is why i will advice everyone reading this article to pay full attention, because it will surley help your trading career forever.
WHAT IS RISK TO REWARD RATIO? Risk to reward ratio is a very large context in the market trading, and the most painful part is that; many traders hears it all the time, but they do not use it, and that is the main reason why they are losing in the market. Risk to reward ratio is very simple, it only contains the two vital involvement of the traders (Risk and reward).
Risk: By my simple definition, the risk is the money we are risking to trade a particular trade. Taking for instance, you enter a trade and place a stop loss of 50pips with a size of 1 standard lot on that trade. This shows that you have risked $500 in that trade $(50 pips x 10) = $500.
Reward: Reward is the actually amount that the trader is aiming to get on a particular trade. For instance, you entered a trade with 1 standard lot, and you targeted 150 pips. This shows that you will make $1500 as your reward/profits if that trade ends in your favour $(150pipsx10) = $1500.
However, risk to reward ratio is the established ratio/difference between the risk and the reward the trader has calculated in their trading setup. Taking for instance, you take a risk of 50pips for a reward of 150 pips, that shows that you have established a risk to reward ratio of 1:3. Same thing goes to the trader that risked 20pips for the reward of 40 pips, that shows the trader has established a risk to reward ratio of 1:2 on that particular trade.
RISK TO REWARD RATIO AS THE BACKBONE OF RISK MANAGEMENT: Lots of traders are just talking about risk management, but they do not really know how to manage their risk in the market. No matter what you are doing, if you do not calculate the risk to reward ratio of the risk management very well, you might still regret all your trading plans at that point in time.
It was this realization that made me know that; even if you had a trading strategy that has 40% winning, you can still be successful in the market, all you need to do is that make sure you have a risk to reward ratio that is more than 1:2. And in my own advice to traders, i love to have the risk to reward ratio of nothing less than 1:3, it is more convenient and better for the trader on the reward side.
LOGIC OF RISK TO REWARD RATIO AS A RISK MANAGEMENT FOR BETTER PROFITING: For instance, a traders has a winning strategy of 50%, a risk to reward ratio of 1:3; through the use of 50pips stop loss and 150 pips take profits on a 1 standard lot. And the trader made ten trades in a month, where 5 of it ended up in losses, while other 5 was profitable.
The total profits of the trader for that month = $[(Reward x number of won trades x lot size) - (Risk x lost trades x lot size)]
= $[(150 pips x 5 x 10) - (50 x 5 x 10)] = $(7500 - 2500) = $5000
Despite the fact that the winning percentage of the trading strategy of the trader is 50%, the trader still managed to make $5000 in that month. This is ever possible through the right calculation of the risk to reward ratio of the trader. It will protect such trader and increase their chance of winning with the right risk management and its calculation.
Mind you, the higher the risk to reward ratio, the better the result of the trader. This same principles applies to the trader that has about 40 percentage winning strategy, they can still make success in the market when they have the right risk to reward ratio in play.
I hope this helps. HAPPY TRADING EVERYBODY!
WHAT IS RISK TO REWARD RATIO? Risk to reward ratio is a very large context in the market trading, and the most painful part is that; many traders hears it all the time, but they do not use it, and that is the main reason why they are losing in the market. Risk to reward ratio is very simple, it only contains the two vital involvement of the traders (Risk and reward).
Risk: By my simple definition, the risk is the money we are risking to trade a particular trade. Taking for instance, you enter a trade and place a stop loss of 50pips with a size of 1 standard lot on that trade. This shows that you have risked $500 in that trade $(50 pips x 10) = $500.
Reward: Reward is the actually amount that the trader is aiming to get on a particular trade. For instance, you entered a trade with 1 standard lot, and you targeted 150 pips. This shows that you will make $1500 as your reward/profits if that trade ends in your favour $(150pipsx10) = $1500.
However, risk to reward ratio is the established ratio/difference between the risk and the reward the trader has calculated in their trading setup. Taking for instance, you take a risk of 50pips for a reward of 150 pips, that shows that you have established a risk to reward ratio of 1:3. Same thing goes to the trader that risked 20pips for the reward of 40 pips, that shows the trader has established a risk to reward ratio of 1:2 on that particular trade.
RISK TO REWARD RATIO AS THE BACKBONE OF RISK MANAGEMENT: Lots of traders are just talking about risk management, but they do not really know how to manage their risk in the market. No matter what you are doing, if you do not calculate the risk to reward ratio of the risk management very well, you might still regret all your trading plans at that point in time.
It was this realization that made me know that; even if you had a trading strategy that has 40% winning, you can still be successful in the market, all you need to do is that make sure you have a risk to reward ratio that is more than 1:2. And in my own advice to traders, i love to have the risk to reward ratio of nothing less than 1:3, it is more convenient and better for the trader on the reward side.
LOGIC OF RISK TO REWARD RATIO AS A RISK MANAGEMENT FOR BETTER PROFITING: For instance, a traders has a winning strategy of 50%, a risk to reward ratio of 1:3; through the use of 50pips stop loss and 150 pips take profits on a 1 standard lot. And the trader made ten trades in a month, where 5 of it ended up in losses, while other 5 was profitable.
The total profits of the trader for that month = $[(Reward x number of won trades x lot size) - (Risk x lost trades x lot size)]
= $[(150 pips x 5 x 10) - (50 x 5 x 10)] = $(7500 - 2500) = $5000
Despite the fact that the winning percentage of the trading strategy of the trader is 50%, the trader still managed to make $5000 in that month. This is ever possible through the right calculation of the risk to reward ratio of the trader. It will protect such trader and increase their chance of winning with the right risk management and its calculation.
Mind you, the higher the risk to reward ratio, the better the result of the trader. This same principles applies to the trader that has about 40 percentage winning strategy, they can still make success in the market when they have the right risk to reward ratio in play.
I hope this helps. HAPPY TRADING EVERYBODY!
The Secret of Successful Trading Is Risk to Reward Ratio
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