How To Properly Use Risk Reward (Education)

4 เม.ย. 2021

Hi Traders. Today's topic is regarding one of the most important fundamental risk management principles. Make sure to follow. One thing about Risk Reward, is that they are very decisive in order to make your account grow Imagine you're taking a trade risking 100 dollars to make only 50 dollars does it makes sense in the long Run? The answer is no, most likely you'll stuck in a chugging condition draining your mental capital and having periods of drawdowns. Risk Reward is something requires good understanding of the execution itself, knowing when to not use it, is as equally important as when to use it. In this post, we'll assume the scenarios and answer the most important questions about it.

Scenarios:

Risk 100 dollars to make 50 dollars or 1 to 0.5 risk reward ratio

- This is the typical unprofitable financial decision. Most of the times new traders try to execute trades without even a decent risk reward, they trade just to be presents in the market, despite of the market conditions. In the long run by executing that kind of trades you will end up having heavy periods of drawdown and you will need huge amounts of trades to be back at BE and even more to make money.

Risk 100 dollars to make 100 dollars or 1 to 1 risk reward ratio

- This is a rather aggressive way to trade. I don't really advise new traders to try to catch that kind of trades. the reason it's because you will need the same amount of trades in profit to be back at BE. this tend to create flat trading equities. I advise to potentially lock one part of the trade if you want. let's imagine this risk reward as a coin. you have two faces and just a 50 % 50% chance. sounds a good deal to make money, looks more like casino. Well it looks like the odds are neutral and they are random distributed. We don't have odds in our favor.


Risk 100 dollars to make 200 dollars or 1 to 2 risk reward ratio

- Well now things start to become more interesting. Why ? because we have more flexibility to make mistakes and keep the same amount and in certain cases end up in profit. Imagine a random distribution of 3 trades like this ? what will happen if you loose those 3 trades ? you will end up with -3%. what if you are right in those 3 trades ? you will end up with +6%!

Risk 100 to make 300 dollars or 1 to 3 risk reward ratio


- This is the kind of trade that I advise new traders to focus on. why because it makes profitable equity curves and allows you to make money. Imagine a random distribution of 3 trades . what if you lose the first 2 and you win the last 1 ? you will end up in profit of 1% in this kind of situation you lost the majority of the trades but even like that you end up in profit? sounds crazy right ? well if you focus on trade high probability trades with 1:3 by having right 3 times you can be up 9 % !!!

Risk 100 to make 500 dollars or 1 to 5 risk reward ratio

This kind of trades are very rare to find but possible.

- From my experience by taking a random distribution of 3 trades if you fail the two you will end up with a -2% loss but if you win the last one you will be up 3% what if you win 2 trades with 1:5 ? it will be more like 10% of profit

Quick disclaimer :
1. This is just a simple risk modeling example. it is not the real trading situation. In real life your risk distribution can me more like one trade -1 second trade +1.5 third trade 2.5 .
In that way you just need to focus on the principles and general ideas to slowly build your risk modelling system.
2. manage your exposure or you will have nothing left to manage
3. Stay away from marketers that tend to say they have a 90% win ratio because they will probably have a 10 % ratio lol...

Let us know in the comment section what kind of risk reward do you use or comment a high value idea with us . make sure to follow

Trade safe as usual.

Do follow my profile for daily fx forecast & educational content.