Utilizing risk-to-reward ratio’s in forex is a popular and easy way to determine profit targets (exiting the trade).

The first step is to calculate the total risk involved in the trade as follows:

entry level – (stop loss level – spread)

(stop loss level + spread) – entry level

Let’s assume the following examples:

Currency Pair: EUR/USD
Entry Level: 1.2500
Stop Loss: 1.2450

Total risk: 1.2500 – (1.2450 – 1) =
51 pips

Currency Pair: GBP/USD
Entry Level: 1.5530
Stop Loss: 1.5600

Total risk: (1.5600 + 3) – 1.5530 =
73 pips

The second step is to calculate profit targets to exit the trade using risk-to-reward ratio’s.

Most common used risk-to-reward (RTR) ratio’s among traders are: 1:1, 1:2 and 1:3.

Examples

If you risk 100 pips to gain 100 pips ==> risk-to-reward would be 1:1
If you risk 100 pips to gain 200 pips ==> risk-to-reward would be 1:2
If you risk 100 pips to gain 300 pips ==> risk-to-reward would be 1:3

What’s the best risk-to-reward ratio used in forex?

It depends on the trader but the larger the better. A good RTR ratio would be at least 1:2. (for example, risking 100 pips to gain 200)