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Risk Reward In Forex Trading

What is risk reward in Forex trading and how can it help you become a more profitable trader?

Well first off i will explain what is meant by risk reward.

When you are looking for trading opportunities it is important to calculate your potential risk against your potential reward. For example if you are entering a trade with a 20 pip stop loss on a risk reward of 2 to 1, your profit target should be at least 40 pips. If you are entering on a 3 to 1 risk reward ratio your profit target should be at least 60 pips, and so on.

Now if you are using a min risk reward ratio of 2 to 1, you can lose 50% of your trades and still be a profitable trader. If you are on 3 to 1 risk reward ratio you can lose 70% of your trades and still be a profitable trader. If you are losing 70% of your trades though you are doing something wrong, but i am just giving you an example of how risk reward can help in making you a more profitable trader.

Now that is what the books and all the other so called Forex experts say regarding risk reward. What do i say about risk reward? I say its a good method in theory, and you can use it if you are comfortable trading that way, but i look at risk reward in a slightly different way.

If i enter a trade and my logical exit gives me 10 pips i will take them. I will not say, well my stop loss is 20 pips so i need to get at least 40 from this trade because i am trading on a risk reward of 2 to 1. It makes no difference to me about a 2 to 1 or a 3 to 1. Pips are pips at the end of the day, profit is profit. If the market gives me 10 pips i will take them, if the market gives me 20 i will take them, if the market gives me 22.6 i will take them. I enter a trade logically and i exit a trade logically. Whats the point in waiting for 40 pips if you get to 20 and the market turns around and stops you out? You have just let a nice winning trade turn into a losing one. Who wants to use a 2 to 1 risk reward strategy, and feel good about losing 50% of your trades? I certainly don’t. I want all my trades to be winners. I don’t want any losers thank you very much.

Some traders say that losing is all part of Forex trading and you should not feel bad about losing. Well i do feel bad about losing. If i lose a trade its my fault, i have done something wrong, i have made a mistake. I have been too greedy, or i have entered a trade at the wrong point. Or my stop loss has been in the wrong place etc etc. I agree that you should not feel bad to the point where you revenge trade, but you should not feel good about losing trades. All losing trades are losers because of something you have done wrong. Occasionally you will get some unexpected news come out that will kill a trade, but more often than not you lose a trade because you have done something wrong, and you should be able to recognize what you have done wrong, and try not do it again.

I am a perfectionist, and my ultimate goal is to have trading perfection. 100% win rate all of the time. I firmly believe that this is possible, if you have a complete understanding of what the chart is telling you, and you are patient enough to wait for the high probability trades. This is what i do. I trade high probability set ups. Risk reward does not play a significant part in my trading. I understand risk reward completely, but i also understand price action and i can enter and exit the market with precision. I take what i am given and i look for another trading opportunity. This in my opinion is the way you should trade Forex. You enter with high probability, you take your pips and you exit, and move on to the next trade. I certainly do not want to be babysitting a trade all day long waiting for my risk reward to get hit. 🙂

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