Bollinger Bands SqueezeMost novice Forex traders think that having a high success rate is something that makes them profitable. If you tell them that you are also a Forex trader, the first question they ask is, “how much is your success rate?” Success rate is important, but having a proper risk to reward ratio is critical. Success rate and risk to reward ratio (also known as R/R ratio) are different terms and topics and they cannot be compared with each other. They have different realities. Having a proper impression of these terms helps you to be a better and more efficient Forex trader to get closer to becoming consistently profitable, in case you are novice trader and you are still learning.
What Is the Success Rate in Forex Trading?
Success rate is the rate of your winning positions to the losing ones. For example, when 65 out of 100 positions hit the target or become closed with profit, then your success rate is 65%. You will never know that success rate is something extremely superficial and meaningless, until you trade while you haven’t become a professional and profitable trader yet. You can close a position with a one pip profit and still call it a winning position. But is this what you are trading for? Are you trading to gain one or a few pips when you win? What about your losses? What if your losses are much larger than your gains, and for example you lose 300 pips when a position hits the stop loss, but your target is 10 or 20 pips or even smaller?
This is the big mistake that novice Forex traders and scalpers make. They haven’t developed the discipline that professional and full-time traders need, but they start trading with real money, and as they feel lots of stress, they close the winning positions too early but allow the losing ones to run for such a long time. They set too wide stop loss and too tight target orders. This is how they wipe out their accounts, and then they give up on Forex trading after reloading their accounts for a few times.
Success rate becomes meaningful and important, when it is considered along with risk to reward ratio. Without having a proper risk to reward ratio, success rate has no place in professional Forex trading.
What Is the Best Success Rate?
Again, this is the question that novice traders ask a lot. This question doesn’t make sense. If your losses are big and your gains are small, then even having a 95% success is not good enough because you can still be a loser at the end of the month. For example, when your gains as 10 pips but your losses are 200 pips, then you need 20 winning positions to recover one loss, which is impossible in reality. With such small gains and big losses, you will be profitable only when your success rate is 100%, which is not realistic in the real world.
What Is the Risk to Reward Ratio in Forex Trading?
Risk to reward ratio or R/R ratio is the ratio of loss to gain in a position. It is the ratio of the stop loss size to target size. So, risk to reward ratio can be different from position to position. It is set by the trader. For example, when you take a position while you set a 100 pips stop loss and a 100 pips target, then the risk to reward ratio of this position will be 1:1. When the stop loss is 100, while the target is 500 pips, then the risk to reward ratio is 1:5. So, risk to reward ratio is 100% under your control, but success rate is not.
What Is the Best Risk to Reward Ratio?
There is no exact answer for this question because risk to reward ratio can be different from trader to trader, based on their trading strategies and styles. Those who give exact numbers as the answer of this question, for example they say 1:3 or 1:5 is the best risk to reward ratio, are not Forex traders themselves and they have never traded professionally. When you give a wrong answer to a question, it means either you don’t understand the question, or your don’t know the correct answer. There is no exact and precise numerical value, known as the best risk to reward ratio. However, I prefer to say, the smaller the risk and the larger the reward, the better.
Risk to reward ratio is very important. When your stop loss size is twice of your target, then even if the number of your winning positions are twice of the losing ones, you will be a breakeven trader at the end of the month. To be a profitable trader at the end of the month, the number of your winning positions must be at least twice of the losing positions plus one, which is not a good and impressive result. Therefore, you should do your best to improve your risk to reward ratio and have larger targets. A 1:1 risk to reward is good, only when you have a good success rate at the same time. For example, you should win 60% of the time. But if your success rate is not good enough, then having a 1:1 risk to reward ratio means you are still a losing or a breakeven trader.
As you see, success rate finds a good meaning and it makes sense, only when we consider the risk to reward ratio first. Without risk to reward ratio, success rate doesn’t make sense.
Therefore, there is no such a thing as “the best risk to reward ratio” because if you can make your targets larger, you must do it and there is no limit for it. For example, nobody will say don’t go beyond 1:5. No, you can go beyond 1:5 and even take 1:15 positions if you can. But the question is, how is this possible?
As I mentioned above, 1:1 is not good enough, unless your success rate is really good. 1:2 and above is great, if your trading strategy allows you to achieve it. For example, in Bollinger Bands Squeeze trading strategy, if you wait for a good, true and typical Bollinger Bands Squeeze pattern, you can set a very tight stop loss, and set the target even 10 times bigger (read this). But other trading systems don’t show you such an optimum level to set the stop loss. In other trading strategies, the stop loss has to be much wider, and so it is impossible to have 1:10 positions. However, 1:1 is good, if your success rate is good. If not, then you should not go for less than a 1:2 risk to reward ratio.
Achieving a Good Risk to Reward Ratio with a High Success Rate
It takes time and effort. You can improve your risk to reward ratio and have a higher success rate, the more your trade and you become able to filter out the false and weak trade setups and get the stronger ones. If so, your stop loss position will become better and you can have wider targets. Your success rate will go higher at the same time. If you reach such a level, then making money through Forex trading becomes possible and you will become a consistently profitable trader.
However, this cannot be achieved overnight. It needs you to improve your understanding from the Forex market. It cannot be done through taking too many training courses by so-called trading gurus who have never traded in reality. It cannot be done by trying different trading strategies and styles every now and then. You must choose the right track and follow it to the end, otherwise you won’t become a consistently profitable trader even after 50 years of learning and practicing. Trial and error doesn’t get you anywhere. It only causes you to miss the opportunities. While 95% of traders lose, even after years of learning and trying, you can start earning money through the Forex market while you are learning the right trading systems and styles. Wasting of time and missing the opportunities can cost you a lot. You need some professionals to show you the right way and help you pass the steps properly: EPIC Trading Forex Signals Review
If you are so new to Forex and you have a hard time to understand the terms like risk to reward ratio and success rate, please start from this article: What Is Forex?