Hi, in talking with “one to one” students in recent weeks it becomes apparent to me that folks need to concentrate far more on calculating their risk reward ratios before placing trades. If you were going to bet on a horse race you would be a fool to risk $1 to $1 unless it was a “red hot favourite” – and we all know how often they can lose! So why would you want to risk similar odds on a forex trade? I always look for a bare minimum of risking $1 to win $2, ie 1:2 risk reward ratio

The first goal of trading is to look for potential trades BUT then you MUST qualify them.

What I mean by that is lets say you have a potential short on the Euro BUT there is a major obstacle in the way in the form of an ema or fib or trend line or major support or resistance you must:

a) Calculate where the stop NEEDS to go, not some arbitrary figure nor “hope,” have a look where price previously stopped and reversed and therefore where its most likely to do so again

b) Having calculated where the stop needs to go for example 50 pips away, then have another look at the potential trade and see where its most likely to be stopped.

In this case if there is a major potential road block within 100 pips, walk away and go find a better opportunity.

You can be a highly profitable trader winning less than 50% of the time IF your wins are at least double your risk.  

When I started trading I had the sickening situation of winning 65% of my trades BUT I lost money! On the other hand my trading partner (Dean Saunders) in the forex mentor program we run has a win ratio of less than 40% some years BUT when he wins he wins big. learn to look for biggest potential trades with the smaller stops. If you can find 1:3/4/5 as we often do then you do not need many winers pe rmonth to become a highly profitable and successful forex trader

I explain how to calculate the risk reward ratio on greater detail in this article and video: How to calculate risk reward ratio in forex

I show lots of practical examples in the following video of why I will ignore some potentially winning trades, but the risk reward ratio is not there. I also show where I aim to place my stops and how I assess where price could go next. Click on the link to see risk reward ratio in action in real time http://www.forextrainingacademy.com/blog/forex-analysis-examples/forex-analysis-calculating-risk-reward

Author: Marc Walton

Risk Reward Ratio