For traders, trading does not always guarantee profit. There will always be risks. Unless the risk reward is properly balanced, you will not be able to earn money in Forex. In this article, what is Risk Reward? I will explain in detail and explain why it is not possible to make a profit in Forex if the risk reward is not set properly.
What is Risk Reward
Risk reward is the ratio of “loss: profit” in one trade. If you buy the dollar/yen at 110 yen, take profits at 110.20 yen and cut losses at 109.90 yen, the risk reward is 1:2 (loss 10 yen: profit 20 yen). becomes.
If this risk-reward is not properly set, it can lead to a losing trap that many beginners fall into. For beginners, many people trade without specifying profit taking points and loss cut points, but this is a big trap.
Take Profit Point and Stop Loss Point
Setting a take profit point and a stop loss point is very important. Especially for beginners, when there is a profit, they tend to pull as far as possible, and when there is a loss, they tend to pull without being able to cut the loss. It is better to think that the profit taking point and the loss cut point are the terminal stations in the trade at that time. If you don’t decide this last point, you’ll drag it all the way down, and eventually you’ll end up with a full deficit.
Optimal risk reward and win rate
Professional traders generally have a risk-reward ratio of 1:2, or even 1:3 or higher. In order to accumulate profits in Forex, you must always ensure that profits are greater than losses. It is the most important thing to make an effort to increase the winning rate of the trade.
Setting Take Profit and Stop Loss Points
Beginners tend to trade without setting profit taking points and loss cut points. But it is extremely dangerous. I don’t know when or what the trade will be. Therefore, be sure to set a profit taking point and a loss cut point.
Also, let’s make it possible to cut losses from 1% to 2% of the total principal. If you cut losses by 10% or 20% in one trade, your funds will disappear in no time.
Why risk reward is important
It is said that risk reward is extremely important in FX trading. This is because of the following reasons.
avoid emotional trading
Where should I enter and where should I take profits? Where do you cut your losses? If you don’t decide, you will end up trading lazily forever. If you don’t always trade with risk-reward in mind, you could lose all your money in just one trade. It is very important to have a clear point and exit.
Relationship between risk reward and winning rate
In order to continue producing stable results in FX, you need to consider that risk reward and winning rate are linked. This is because if the risk/reward ratio becomes 1:10, you will only be cutting your losses, and you will be poor at cutting your losses. If you set the risk reward at a balance of 1:2 or 1:3, your winning rate will be very high.
Win with risk reward alone
It would be a lie to say that you can win based on risk reward alone. If the risk reward ratio becomes 1:10, there is a high probability that the number of stop losses will increase. Balance is very important in everything. As explained above, if you set the risk/reward balance around 1:2 or 1:3, your winning rate will be very high.
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