Risk Reward Ratio in Forex
Lots of traders believe that good market entry is the key to success. Unfortunately, most are wrong. As a trader, you must consider each trade as a business transaction. A risk to reward ratio in forex trading compares the potential for the reward with the potential for loss. Risk is calculated by counting the pips between the expected entry price, and the expected price at which you want to exit the market in case of losing a trade.
To accurately calculate risk, you need to look for high probability transactions with a risk to reward ratio of 1: 2 or higher, depending on how long you want to trade. For example, if you are a daily trader looking to earn only 30 pips in a trade, a stop loss of 15 pips is enough for the risk to reward ratio of 1:2.
Likewise, while calculating the risk reward ratio in forex trading, you would need to determine your total risk by taking the number of shares, the entry price, minus the stop-loss price, and multiplying it by the number of shares. In this example, suppose you have 1,000 shares and a stop-loss of $ 19 with an entry price of $ 20, the difference being $ 1.00 multiplied by 1,000 shares; you would have a total calculated risk and reward of $ 1,000. To calculate your goal, multiply this risk by 3 to obtain a risk reward ratio of 3: 1.
What is a good risk reward ratio? 
Regardless of the thousands of risk reward ratio formulas available out there, it’s always recommended to have a risk reward of 3: 1. However, it is not so simple; using this type of method simplifies the calculation. It’s essential to consider is what happens if you have a 3: 1 risk reward in your trading plan but only 1.5 to 1 or even 1 to 1? Some of the reasons may be that you sell too early or that you are afraid. In the course of 20 transactions, if you do the calculation backward and determine that you are only 1: 1 instead of a calculated risk and reward ratio of 3: 1, you can see how this will affect your long-term financial results.
Finally, in determining the risk reward ratio in forex trading, it is essential to decide on your percentage of success using your risk reward calculator. If you win 50% of the time and reach your 3: 1 goal, you will earn money.
