How to Reach Your Desired Risk/Reward Ratio in Forex Trading?

Written by Karen Bryan

tradingThe market of Forex trading is versatile. There are many ways to gain profit in this business with equal chances of risk. But due to numerous methods of profit gain, you need to think of all possible risks and factors that can affect your Forex trading. Because only by anticipating the upcoming dangers, you’ll be able to form a strategy strong enough to counter them.

This strategy also depends on you knowing your risk threshold. Many startup retail home traders resist investing more due to the fear of loss. This, on one hand, is because of lack of planning, and on the other hand due to lack of information on what risk to reward ratio must be selected.

Here’s a guide to help you decide your risk to reward ratio in Forex Trading.

Setting the Right Risk to Reward Ratio

Many startup retail home traders are misinformed of setting low profit targets so that they could escape the chances of risks. However, the truth is the greater the target i.e. profit against the stop loss, the lower are the chances for risk. For example, if you set your target higher i.e. 100 pips and your risk rate or stop loss to 10 pips, your risk to reward ratio will be 1:10 in the trade.

How to Gain the Desired Risk to Reward Ratio?

Setting a 1:3 or 1:5 ratio is ideal and achievable only when you have successfully built a stronger trade setup and you entered the market on the right time. Moreover, many people take position with 1:5 ratios of loss to target and prefer waiting until it hits their loss to target ratio. This is not recommended because this way you will have more losing trades long before you have a winning trade.

The best solution to have this ratio is to move the stop loss. You must not keep your stop loss fixed at the initial position but divide it equally into three parts. Each part must be divided such that it is equal to the original value of stop loss.

For instance, if you have chosen a stop loss value of 40 pips, the final target for profit must be 120 pips. This should be divided into three 40 pips parts. Now you may move your stop loss in three cycles. Assuming that you chose a risk of 3% in each cycle of trade, if the price reaches to first 1/3 stage, you are recommended to stop the loss vale to breakeven. In this situation, if price doesn’t favour you and hit your stop loss value, you will come out clean without getting hit by any profit or loss value.

In the same way, if the price reaches 2/3 cycle, you must move the value of stop loss to 1/3. In this scenario, if the price doesn’t favour you and hits the value of stop loss, you will come out with a profit equal to your initial risk. This will be a 1:1 risk to reward trade. The same thing goes for the third cycle. In this way, you’ll be able to get a desired risk to reward ratio.

If you feel you’re unable to decide the risk to reward ratio for your Forex trade, ETX Capital can assist you in gaining maximum benefits with fairly low levels of loss.