Money management system #5 (Winning risk : reward ratio)
Submitted by Edward Revy on August 25, 2009 - 02:51.
Risk/reward ratio is one the most influential parameters of any Forex system.
A good risk/reward ratio is able to make an unprofitable system profitable, while poor risk/reward ratio can turn a winning setup into a losing strategy.
What is risk/reward ratio?
Risk - simply referred to the amount of assets being put at risk. In Forex it is the distance of our Stop loss level (in pips) multiplied by the number of lots traded. E.g. a stop loss at 50 pips with 2 lots traded would give us a total risk of 100 pips.
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Thank you for your graph and chart.
good article, i think the important point is that a great deal of traders are lookin for the holy grail and go from system to system in order to 100% winning trades. the point you make shows that you can have a system that may only achieve 50% winners but if your winners (including expenses like spreads etc) in pips are greater than your losers then you potentially have a good system.
hello
what u said about risk/reward ratio it just good on the papper but most time the market has too many highs and lows so get ur SL then get ur TP!!!
mahmoud
Hi Mahmoud,
I respect your opinion, but what I've described should be the goal, the strategy to always keep in mind while trading.
While mentioning paper trading, I think you meant that traders won't get an ideal situations every time. That's true, but we learn from simple examples in order to have an idea and a strategy when the market sets another challenge for us.
With practice comes experience and ability to recognise and trade a larger variety of patters and setups.
Best regards,
Edward
Excellent explanation and example on risk/reward ratio! The graphs allow the info to sink in. Thank you very much!
Hello Edward,
I have difficulty setting my SL and many times get hit then price went back to my initial entry direction.
I learn somewhere that ATR indicator is good tool to use for SL and reward basis i.e. 1X ATR or 2X ATR etc.
Appreciate if you care to explain how to use this ATR to measure SL and TP.
Thank you very much!
newboy
Hi newboy,
Yes, ATR is known to help with setting volatility relevant stops.
Check out the following page which talks about ATR and ATR based stops is greater details.
Kind regards,
Edward
Thank you,really good material. Thanks so much.
newboy
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