If you have experienced “miscalculation” events while trading forex, then there are some important things about the Risk And Reward ratio that you need to know. By knowing the Risk And Reward ratio, you can improve trading performance and increase confidence in the trading system used.
Now, what is the Risk And Reward ratio?
Risk And Reward ratio is a comparison between risk to return. Or in the world of trading is often called the comparison between the loss to profit.
Then how is the relationship between the experience above and the Risk And Reward ratio?
With the Risk And Reward ratio, you can manage so that in one loss, all profits are not immediately sold out and in the long term the difference between profit and loss on the balance becomes more surplus. Interesting right?
The Relationship Between Risk And Reward Ratio With Winrate
Many traders, especially novice traders, really adore or idolize high win rates, if possible without a loss (100% win rate), why do you have to have high win rates or no loss? Everything comes from one thing, WANT TO PROFIT. With a high win rate, the hope of successful trading within a week immediately becomes a reality. If you are sure to profit, it means that you are getting rich quickly.
If you have ever expected a high win rate strategy in this way, then we are in the same boat. I also used to like things that smelled fantastic like high win rates and huge profits on transactions. The point is I want to be sure to profit and must be big. Small profits are less of a “surprise”.
Unfortunately, the facts are not in line with expectations. The proof is that many of my accounts have run out and I have become a deposit subscription. Then what’s wrong?
After a while, I started to dig deeper. Does the strategy have to be a high win rate before it can be profitable? Do great traders like market wizards have winrates close to 100%?
I then started to read a lot of trading books from abroad such as the Market Wizard book from Jack Schwager and books on the correct application of risk in trading. From the many books I read, I found the same message, great traders are very good at risk control.
Many of them have win rates below 60%. In other words, the winning rate cannot be used as the only benchmark for a system to be profitable in the long term. The winning rate must be paired with the Risk And Reward ratio to see the long-term performance of the account.
Combining the winning rate with the Risk And Reward ratio to see the possibility of an accounting profit in the long term is called the expectancy-value.
How to Determine Risk And Reward In Trading
Determination of Risk And Reward is quite simple. Here are the principles:
– Risk is calculated from the distance from the entry price to the stop loss price
– Reward is calculated from the distance of the entry price to the take profit price
– Risk And Reward ratio is calculated from risk divided by reward or distance to stop loss divided by distance to take profit
Risk is calculated from the distance of the entry price to the stop-loss price (red area), while the reward is calculated from the distance of entry to the take profit price (green area). In the opportunity above, the risk offered is 80 pips and the reward is 126 pips.
Thus the discussion about the Risk And Reward Ratio, hopefully this article is useful.
