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Risk Reward Ratio in Forex

Discussion in 'Forex Discussions' started by painofhell, Feb 24, 2016.

  1. painofhell

    painofhell Content Contributor

    Jun 24, 2015
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    The Risk Reward Ratio in Forex Trading.

    One of the keys to money management is applying a proper risk reward ratio in Forex trading. Every trade in the foreign exchange involves a certain amount of risk. So each Forex trader must carefully assess how much risk he can handle before entering a position in order to mitigate losses and protect his trading account. Most traders use the risk reward ratio as a measure of risks involved in a trade, as it depicts how much money is being risked versus the maximum profit or reward. And it proves to be a very important risk and money management trading strategy.

    Determine the Risk Reward Ratio in Forex.

    First, you need to calculate the amount you are using to trade, which represents the risk. Your total risk is the number of lots multiplied by the cost of the currency. Now, you’ll need to calculate the reward, or the maximum profit you can make from that particular trade. The gain in currency value multiplied by the total number of lots traded is your reward value. Thus, you can easily get the ratio, and determine what’s your next move should be depending that risk-reward ratio calculation.

    Example of using Risk Reward Ratio in Forex.
    In order to be more specific, let us go through an example. Suppose, your risk value is $1000, and you stand to make a profit of $2500 from that particular trade. Then, your trading risk reward ratio is 2:5. Better Risk Reward Ratio in Forex, usually generates higher profits over the long run.

    Traderisk reward ratio - gps forex robotrs should basically look for a minimum risk reward ratio in forex of 1:2. However, a better ratio can be more profitable. Thus, a satisfactory ratio for forex traders should be 1:3. If you calculate it to be less than that, then that trade should be avoided. That, as it involves more trading risks. Most experienced forex traders use 1:5 or higher. They do it even if they have to wait for such an opportunity for a long time. The higher reward makes up for the waiting time. On the other hand, exceptions are strategies with a lower ratio, might even be slightly negative. It can be effective when there are extremely high probability trades. These kind of trading strategies might generate decent profits for the short terms.The risk-reward ratio is considered to be an essential risk management tool, and all forex traders therefore should study it carefully. That way you can mitigate losses,maximize profits, and take better and smarter trading decisions.
    prav likes this.
  2. Sharon Higgins

    Sharon Higgins New Member

    Oct 29, 2014
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    Understanding the risk and reward ratio is definitely not an easy job for anyone, I believe a lot of hard work has to go into this and only then we are able to found out correct way of working. If we understand how to manage risk/reward then it will really define us but without those stuff we are always likely to struggle. I trade with OctaFX broker and through them I am always in good zone. This is to do with the low spread that I have to pay at just around 0.2 pips for all major pairs while there is also high leverage up to 1.500 which too is seriously useful and allows me to work well without facing any major stick or trouble at all.

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