The Forex Risk Reward Ratio has been in debate since the beginning of time. If you have been trading FX or simply read up about it you would be familiar with the terms used. When it comes down to Risk Reward we have 2 types of traders or strategies. On the one side we have our Scalping(Pip and Run) traders. This strategy usually leads to short term trades. The frequency and trade volume is also often much higher. The second type of trader focuses on their Risk Reward Ratio. The most common used is 1:2. Also referred to as Day Trading or Day Traders.
It has been said that it is not possible to be profitable long term when scalping the market. Forex Authority, Sterling Suhr from DayTradinfForexLive(DTFL) has been challenging anyone to show him a long term profitable track record by simply scalping. A very bold statement to make to say the least. In my honest opinion from personal experience, I have to agree with this statement. Again, everyone is different and there is no factual right or wrong in this equation. Can you prove us wrong? We would love for you to share your track record in the comments below. We are not afraid to admit when we are wrong…
The Ideal Forex Risk Reward Ratio
Scalping set aside. If you plan on trading Spot Forex from a retail point of view profitably, YOUR Risk to Reward Ratio should be a minimum of 1:2. What exactly does this all mean? Simple explanation. For every 1 risk you have a potential reward of 2. Risking 50ZAR to make a potential 100ZAR. This allows for a lower win rate while still maintaining a profitable track record. Breaking that down into win vs. loss allows for a positive gain if you should win 1/2 trades, which only equals a 50% win ratio.
(2xRisk)1 Win @ 100ZAR – (0.5xReward)1 Loss @ 50ZAR = 50ZAR Profit
To simply breakeven you can get away with winning 1/3 trades. So even winning an average of 45% of your trades with a solid 1:2 Risk Reward Ratio will yield good profits. This is much more realistic when it comes to win ratio. Traders often look past all the benefits the freedom of a having a higher risk reward has to offer other than just sustainable profits. Much less pressure is put on you. Less forced trades, better focus and a much more relaxed mindset while trading. This all in return makes you a better trader.
It is worth mentioning that you are not limited to a 1:2 RR. You can always lock in your profits by moving your Stop Loss and Take Profit. Using a trailing Stop Loss is an adequate way to protect profits and increase your reward! 1:3 or 1:4 Risk Reward trades are not uncommon when managing your trades sufficiently. There are countless online calculators and tools you can use to make life just that much easier when it comes to trade management and achieving a high level of Risk to Reward.
While the information above has been profitable from my personal experience, there is no guarantee this will work for you. There are no guarantees in trading. If you want to play things on the safe side, this might just be the right option for you. Let your Take Profit & Stop Loss work for you! Best of all, no need to be glued to the screen all day. Set and forget.