What Is the Proper Risk Reward Ratio in Forex Trading?

It is very easy to find hundreds of articles on risk/reward ratio in forex trading.

But the problem is that most of those articles are not written by the real and professional traders.

By “real and professional traders”, I mean those who are consistently profitable currency traders and currency market investors.

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Most of these articles are written by freelance writers who are paid to write articles.

Or maybe they are bloggers and webmasters who want to drive some traffic to their blogs and sites.

Most of these writers have never placed any order on the markets throughout their lives.

The bigger problem is that novice traders believe each and every word of these articles, just because they are published on the Internet.

They don’t know that the directions that these articles give are not applicable in live trading at all.

After reading these articles, novice traders try to apply them in their trades, and after such a long time of trial and error, they will think that they are not able to follow the trading rules.

So they give up.

But the problem was somewhere else: It is the information and directions of the articles that couldn’t be applied in live trading.

For example, in most of the articles you read about risk/reward ratio, it is strongly recommended that novice traders should not even think about taking positions with a risk/ratio of as high as 1:1 or even 1:2 (I will explain what these numbers mean later in this article), and the minimum risk/reward ratio of the positions that new traders take should be 1:3.

There is nothing wrong with it so far.

But the problem is that these articles never clarify whether traders should have a low risk/reward ratio through having wide targets, OR, by having tighter stop losses.

As nobody likes to lose, specially new traders, they all think that they should make their stop loss as tight as possible to have a low risk/reward ratio trade, whereas this is a big mistake.

No matter how tight or wide the targets are, a trader cannot fool around with the stop loss.

Choosing the stop loss has its own rules that cannot be ignored and broken.

If you set your stop loss tighter than what it has to be, you will be stopped out easily even when your position is correct.

Something that looks even stranger in these articles is that they emphasize that “novice traders” should not take positions with 1:1 or 1:2 risk/reward ratios.

Does it mean that experienced traders can do it?

Are there different trading rules and techniques for novice and experienced traders?

The Same Rules for Everybody

Maximizing the profit and having 1:3 or 1:5 trades can be done by professional and experienced traders.

However, there are some technical and emotional difficulties in front of novice traders to do this.

For example, to achieve a successful 1:5 trade, you may have several losing trades (I will tell you why), unless you know how to choose the strong trade setups.

This is not a problem for professional traders at all.

But for a novice trader who is learning the techniques and has to build their confidence at the same time, having losing trades can cause lack of confidence and excessive fear that prevents them from advancing to the next steps.

So we cannot believe and apply whatever we read over the Internet.

There are zillions of systems, techniques, indicators, robots and… that are absolutely useless when it comes to live and real trading.

What Is Risk/Reward Ratio?

After the above introduction, let’s see what risk/reward ratio is and why it is important in Forex trading.

Risk is the amount of the money that you may lose in a trade.

If you’ve already read the money management article, you know that we should not risk more than 2-3% of our capital in each trade.

It means when we find a trade setup and we find a proper place for the stop loss, we have to choose our position lot size in the way that if the market hits our stop loss, we lose maximum 2-3% of our capital.

For example, let’s say we have found a trade setup with EUR/USD that has to have an 80 pips stop loss.

The account size is $5000.

If EUR/USD hits the stop loss, we should lose $150 which is 3% of our capital:

0.03 x $5000 = $150

It means 80 pips equals $150 (you can use the position size calculator I have on the money management article).

This $150 is our risk.

But what is the reward?

Reward is the profit that we can make in a trade.

In the above example, if we choose a 160 pips target for our trade and EUR/USD hits this target, we will make $300 (when 80 pips equals $150, so 160 pips equals $300).

This $300 profit is the reward.

So what is the risk/reward ratio of this trade?

It is 1:2 because:

150:300 = 1:2

The larger the profit (target) against the loss (stop loss), the smaller the risk/reward ratio which means your risk is smaller than your reward.

For example, if your stop loss is 20 pips in a trade and your target is 100 pips, your risk/reward ratio will be 1:5.

What Is the Recommended Risk/Reward Ratio in Forex Trading?

1:3 or 1:5 risk/reward ratio is achievable when (1) the market trends after forming a strong trade setup, and (2) you succeed to enter on time.

You need to be able to enter the trending market, when the trend is newly started, or if you enter at the middle of the way, the trend has to be strong enough to give you another big movement and make a profit which is 3 or 5 times bigger than your stop loss.

You can do that, but there are a few problems:

1. Markets usually trend only less than 30% of the time.

2. Some trends are not strong enough that if you enter with delay and while the trend is at the middle of the way, they can’t hit a target that is 3 or 5 times bigger than the stop loss.

3. Sometimes you miss the trends.

For example, you hesitate to enter, and so you miss the chance.

Or, you think you have found a trend whereas you are wrong and it turns around and hits your stop loss, and things like that.

So you lose in many trades, because you want to catch a big one.

Therefore, in reality, you either have to lose in many trades, or you have to have many of your trades closed at breakeven by the stop loss (because you will have to move the stop loss to breakeven when you are in a special amount of profit), or you have to stop trading for such a long time and wait for a strong trend, until you can have a 1:3 or 1:5 trade.

Is It Possible to Catch the 1:3 or 1:5 Trades?

How is it possible to catch a 1:3 or 1:5 trade without losing so many trades or waiting for so long?

If you take a position with 1:3 or 1:5 stop loss to target ratio, and then you wait for it to hit your stop loss or target, you will have so many losing trades before having a winning one.

The reasons are mentioned above.

1. Moving the Stop Loss Further

One solution is in moving the stop loss.

You should not let your stop loss remain at its initial position.

To have a 1:3 trade, the distance of your entry and your final target should be split into 3 parts (at least), while each part is equal to your original stop loss value.

For example, if you have a 50 pips stop loss, you should have a final target of 150 pips that should be split into three 50 pips levels.

Then you should move your stop loss in three stages.

In this example, I assume that you want to take a 3% risk in each trade:

1. If the price reaches the first 1/3 level, you should move the stop loss to breakeven.

At this stage, if the price goes against you and hits the stop loss, you will get out without any profit/loss, BUT you should consider that you had an initial risk of 3%.

2. If it reaches the 2/3 level, you should move the stop loss to 1/3 level.

At this stage, if the price goes against you and hits the stop loss, you will get out with a profit that equals your initial risk.

For example, if your stop loss has been 3% of your account, you will get out with a 3% profit.

Therefore, such a trade will be ended as a 1:1 risk/reward position.

3. If it becomes so close to the final target, you should move the stop loss to 2/3 level.

Then you have to wait until it hits the final target or returns and hits the stop loss.

At this stage, if it goes against you and hits the stop loss, you will get out with a profit which is twice of your initial risk.

For example, if your stop loss is 3% of your account, you will get out with a 6% profit.

Therefore, such a trade will end as a 1:2 risk/reward position.

If the price hits the final target, your trade will close with a 9% profit.

Therefore, you will have a 1:3 risk/reward position.

So, to have a 1:3 trade, you will have some -3% trades that are those positions that hit the stop loss at its initial position.

You will also have some 0% trades that are those trades that hit the stop loss at breakeven.

Some of your trades will be +3% trades that are the ones that hit the stop loss at 1/3 level.

Some will be +6% trades that are the ones that hit the stop loss at 2/3 level.

And finally, some trades will be +9% trades that are the ones that trigger the final target.

2. Taking the Too Strong Trade Setups

Another solution is in taking the too strong trade setups on the long time-frames like daily, weekly and monthly.

Wait for the too strong trade setups.

They are usually strong enough to move the price for hundreds of pips, and so you can have wide targets.

How Many of Your Trades Will Be -3%, 0%, +3%, +6% and 9% Trades?

It is impossible to answer the above question.

It depends on many factors, including the trading strategy and the markets condition.

However, there is something that gives us a clue about the number of our 1:3 and 1:5 trades.

It is the fact that says market trends only 30% of the time.

It goes sideways 70% of the time.

To have 1:3 and 1:5 trades, we should have a strong trend, otherwise the price hits our stop loss.

It means it stops your position before reaching the final target, no matter what time-frame you use to take your position.

No need to remind again that in any of the -3%, 0%, +3%, +6% and 9% trades, your risk is the same which is 3%.

The first conclusion is that taking the risk and the position is up to you.

However, it is the market that determines how your trades end.

This is something that all traders, specially the novice ones should consider.

When you read in different websites and web pages that you should take the 1:3 and 1:5 trades only, then you should consider that you really never know how many of your trades will end as 1:3 and 1:5 trades.

Never Break Any of Your Rules

I set the stop loss of my positions based on the technical analysis rules.

I will never break any of these rules.

Some traders think that my stop losses are too wide, but they are not.

Some traders always have a fixed stop loss size.

For example, any positions they take, with any currency pair and any time-frame, has a 120 pips stop loss.

But, I mainly follow the rule of thumb we have for setting of the stop loss.

The rule says that you should place your stop loss in a position that it becomes triggered only when the position you’ve taken is completely wrong.

So, when I want to set the stop loss, I ask myself that under what condition the position I have taken will be wrong?

The answer I give to this question is the position of the stop loss.

Are you new to Forex trading?

Then learn how to take the strongest trade setups on the longer time-frames.

Read these article carefully to save a lot of time and money and become a consistently profitable trader sooner:

  1. Become a Profitable Forex Trader in 5 Easy Steps
  2. One of the Biggest Forex Trading Secrets
  3. How to Be a Disciplined Trader
  4. Still Losing in Forex?
  5. Monthly Time Frame Is the King
  6. Trading Strategies Don’t Work If You Don’t Choose the Right Living Strategy
  7. Make Your First $100,000 Trading Forex

Proper Risk Management in Forex Trading

You can sit at your laptop, trade Forex and make a lot of money from the comfort of your home. This is too exciting and attractive to everybody. It looks like a very easy business at the beginning. You start reading about Forex and soon you will realize that Forex really makes money.

First, we are eager to find something that makes money. When we succeed to find it, we think about the ways that make more money with it. You ask yourself whether it is possible to make more money within a shorter time.

Humans are infinite by nature. They are never satisfied. We don’t want to be limited at all. We want to be free to do anything we want. When it comes to Forex trading and we see that it can potentially make lots of money, we want to maximize the money it makes.

One of the ways that comes to our mind to make more profit within a short time, is taking bigger risks. This is a way that comes to the most of the novice traders’ minds, specially because many of them cannot open a live account with a reasonable size. However, this is a risky way. I will tell you why. There is a much better way to grow your account faster. Before talking about that way, please see the below examples to see how taking a high risk can “theoretically” grow your account much faster, but it can practically wipe out your account.

If you open a $1000 account and make 5% profit per month, your account balance will be $3,225.10 after 2 years, if you don’t withdraw any money and keep on making 5% profit every month for 2 years.

If you keep on trading that way, your account balance will be $18,679.19 after 5 years.

I don’t say that you can consistently make a 5% profit for 5 years. You will have some losing months as well. These numbers are just examples.

If you can neither make more profit, nor can you open a larger account, you have to be happy with the rate that your account is growing, or you have to find a different way to grow your account faster which can be more riskier as well.

If you open a $50,000 account, and make the same 5% profit per month, your account size will be $161,255.00 after two years (of course if you don’t withdraw any money for 2 years). Then you can keep on making 5% profit per month, and withdraw $8,062.75 every month. That is not bad. Indeed, it is a good monthly income. But the problem is most of you cannot open a $50,000 account at the beginning.

So the only option that comes to your mind, is taking a higher risk. That is when the greed takes the control and you can lose your shirt because of it: You think you open a $1000 account with a 500:1 leverage. You can take a 1 to 2 lots positions with such an account without any problems. Then you calculate and will see that if you open a $1000 account and make 100% profit per month (you double your account every month), you will have $4,096,000.00 after one year or $16,777,216,000.00 after two years (of course if you don’t withdraw any money).

Wow! It is amazing. It is mind boggling, isn’t it?

You can become multi-millionaire within 1 to 2 years, by risking only $1000.

Right?

Wrong!

Having such a big amount of money in the trading account you have with a broker is possible only on the paper, not in reality. Read these articles:

  1. Trading Strategies Don’t Work If You Don’t Choose the Right Living Strategy
  2. Some Forex Trading Facts and Myths You Must Know

The other thing is that it is impossible to make a 100% profit every month for several months or a few years while your account leverage is 500:1 and you are risking too much. Those who try to double their accounts every month can get lucky to do it once or twice, but then they will wipe out their accounts the following month. To double your account within a short time, you have to take too much risks that will result in big losses finally. If it was that easy, now we had so many millionaires in the world who would do nothing but trading Forex from the comfort of their homes.

The problem is 99.99% of the traders decide to turn a small amount of capital to a huge wealth, while they haven’t properly learned to trade yet, and they haven’t passed all of the learning stages. They open an account and try to double it every month after a few weeks/months of learning and practicing. Therefore, they lose their money and blow up their accounts.

Many of these traders top up their accounts a few times, but the same thing happens over and over again. Why? Because they don’t know how to trade. They want to double their accounts every month through Forex trading, but they don’t even know how to trade properly. They don’t even know the basics.

So… a sweat dream changes to a nightmare, and someone who wanted to become a multi millionaire within 1 to 2 years, gives up on Forex trading after losing several thousands of dollars.

You should complete the learning stages first. Then you can open a live account, take a reasonable risk in each trade, manage your risk, position and profit, and grow your account slowly and steadily.

1. We have already talked about completing the learning stages a lot. You can follow the below post carefully and you will pass the learning stages easily and without any headaches: Become A Profitable Forex Trader In 5 Easy Steps

2. Now, I assume that you have passed all the stages and you have repeated your success with your live account at least for several months consecutively. Above all, I assume that now you are patient and disciplined enough to wait for the strong and perfect trade setups. So your success rate is really high. I mean you pick the trade setups that either hit the targets, or at least give you the chance to move your stop loss to breakeven. So you are now ready to grow your account.

Start with a small account at the beginning. Don’t think that if you open a big account, you will shorten your way. Risking a larger amount of money creates harmful emotions that don’t let you trade properly. Your greed pushes you to open a larger account, and then your fear makes you blow up the account.

3. You should trade patiently until you double your initial small live account. I don’t know how long does it takes you to do this. But be patient until you do it. Then withdraw the initial capital and leave the profit in your account. You are now trading with your profit, and you are not risking your capital money.

Don’t forget to read these articles:

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"Whether you think you can, or you think you cannot, you are right." - Henry Ford

9 Comments

  1. I want to thank you for all the knowledge, and your kindness, I will follow you and invest in your knowledge in my trading, as I am a demo trader since 6 years ago, I have mostly studied in the field and traded with demo for about 6 years , and I read your articles it’s true, and is so genuine, true, I will write how it will go for me to you, because I am mature to start live account, thank you for your support to the 100 percent LuckScout team mvh benjamin schmidt

    • It has nothing to do with the account size. Any account you have, you need to risk 2-3% of your account balance in each position.

  2. Thanks you for your time and generosity to teach anyone about trading forex. By following the rules of risk reward and discipline in trading as stated above, I believe a small trading account will grow as low as 5% every month.

  3. If you trade with a real market, then I mean you should be your own broker like a real ECN-STP, and make your trade with traders that you have customers in your brokerage company to the liquidity providers’ banks, this is much easier than what many do not believe and understand. When you speculate on the stock market, you interact directly and indirectly with an infinite number of other players who possess different preferences, knowledge and strategies. The only thing that unites you is the vision to get the right direction. about making clips. But the stock market and the securities trade seem to believe that the buyer believes in a rise or the seller believes in a decline, we can take an example, if the sell price is 0.9540 and the buy price is 0.9543 then it is a trade of 3 pips, while the price data changes in its price data course constantly as an example, the buyer and seller they buy to get their trade in the right direction on the price data, but it is not enough to see the price data you must be able to read the trade, where it is heading in its direction, it is when the direction of the graph rises or falls in its infrastructure in its trend direction it will always make one lose and one becomes the winner for every movement in the price data. pips value after the control market for the price data to move in the value and it is a high price to pay for a low profit factor, then I mean that the buy and sell price as an example 0.9540 – 0.9543 = becomes 0.0003 the value in the difference of these currency pairs, then we have not seen where the graph is moving or the direction of the trend, only the price data which is the difference 0.0003 the direction of the trend on these currency pairs what is this. yes it is the most important factor in a trade, to understand, and I mean that one must be able to read events in real time but see a future form in the event. in the graph and market events such as politics, news, banks ‘business operations when and how information enters the graphs’ significance for this is what governs the entire direction of trading in the system. Suppose there is a graph that you see in OTC OR CFD In your trading platform, we note that it reflects the other 2 graph which is the underlying graph TYPE index currency as incoming data, which flows into graph 1 in the first graph, then have a shift time that is lagging behind to graph 1, and then you have the 3 graph that reflects the infrastructure that the host’s political rules and regulations flow on in the host’s infrastructure, and the currency’s infrastructure and shapes and reflects into the underlying graph 2, or it can be the company’s business in the real development, then it is when the time unit goes into the underlying graph when you can see this and when it falls into the graph as a up trend, and down trend, everything is based on what the trend does in its trading, when the information enters the graph, everything is based on the market and when it goes into the graphs. It is not buyers and sellers who control this. without the trend of the graph. and what controls the incoming data from the providers exchanges, where your rendered profit arises at the expense of someone else’s loss .this is only the first phase of the exchange’s strategy or OTC which is not an exchange but is a broker’s trading terminal so it is, but If you want to make a real currency trade then you can negotiate with import and export trade for companies that make currency exchanges for their production, this gives much more profits and safer trade. But if we go further in Forex trading, we have the price data and a leverage that regulates your trading to a higher value to get more value of the currency from the pairs on the base and the price of the counter currency in the price data, this is controlled by banks and the state and politics. value in supply and demand as the market’s infrastructure but who controls .up and declines in the graph trend I know that pips value 0.0003 if now this has been traded in a whistling rise then the new pips values will live its life in a certain time when the market changes all the time, it gets saturated then it turns in balance with the couple’s currency because I know that the currency changes in its value according to political decisions, human infrastructure, and Riksbank’s governance then it is important that you learn when banks buy or sell currencies it is about timing there.

  4. Regarding the setting of stop losses, I admit that I have not taken it seriously,
    as if we human being need to learn from failure or loss.
    once I wanted to operate the Symbol US30, I select M30 time frame , size 0.1 lot, sell order at 28779.3, tp at 28771.9,
    but after I enter the order , the price did not drop down but it rose up to 28899.1.
    Because I didn’t set stop loss,this order let me lost $1200
    so as a trader ME cannot fool around with the stop loss.

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