Risk-To-Reward Forex Exit Strategy

Risk-To-Reward Forex Exit Strategy

Details

Written by Tom Welles

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:

I. For buy trades

entry level - (stop loss level - spread)

II. For short trades

(stop loss level + spread) - entry level

Let's assume the following examples:

Currency Pair: EUR/USD
Trade Direction: Buy
Entry Level: 1.2500
Stop Loss: 1.2450
Spread: 1 pip

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

Currency Pair: GBP/USD
Trade Direction: Short
Entry Level: 1.5530
Stop Loss: 1.5600
Spread: 3 pips

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)

Additional: Forex Robots and risk-to-reward

Automated robots usually utilize awful risk-to-reward ratio's. The vast majority of them risk at least 150 pips to make a 10 pip profit, that's a 15:1 risk-to-reward ratio!

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