Best risk reward forex strategy

Rare Forex Trendline Trading Strategy (GREAT RISK REWARD RATIO). I want to share with you another rare forex trendline trading strategy which is off course.
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Hence, if you are a swing trader or position trader instead of a scalper or short term trader, the negative effects of spread as a transaction cost would be much lower to your bottom line.

Aside from understanding the overall risk to reward ratio of your trading strategy, you also need to figure out the impact of win rate, which is an integral part of the risk to reward ratio analysis. If you already know the historical risk to reward ratio of your trading strategy from back testing, there is a simple formula you can apply to figure out what kind of win rate you will need to maintain to remain profitable in the long run. The formula to find minimum win rate is following:.

For example, if you know that your trading strategy has an expected risk to reward ratio of from extensive back testing, then plugging this into the formula would yield the following outcome:. If you already know the win rate of your system from extensive backtesting, but yet to figure out what kind of risk to reward ratio you will require to remain profitable in the long run, then you can apply another formula to find out the necessary risk to reward ratio.

The formula to determine required minimum risk to reward ratio is following:. So, to remain profitable in the long run with this trading strategy, you need to maintain a risk to reward ratio of at least As you can see by now, the win rate of your trading strategy plays a vital role in the overall risk reward equation. Manually calculating risk to reward ratio could seem like a tedious process at times. You can use a simple calculator to find the effective risk to reward ratio of your trades, or you can use several tools to simplify the process , including a Microsoft Excel sheet or an online FX risk reward calculator.

However, beyond that there is a much easier way to do the RVR calculation if you are using a charting software like MetaTrader 4. In addition, there is a built-in tool in most charting softwares, including MetaTrader 4 , namely, the Fibonacci retracement tool that you can use to effectively calculate the risk to reward ratio of your trades. While most Forex traders use the Fibonacci retracement tool to calculate the Fibonacci levels of a significant price swing, with slight modification to the retracement levels, you can use it to visually identify the risk to reward ratios as well.

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In MetaTrader 4, you can add custom extension levels like 2, 3, 4… and so on. Please note that these levels would not represent Fibonacci ratios and only serve as a visual reminder about the potential risk to reward price levels of the trade you are about to take. Then plot the Fibonacci retracement tool upside down, where level will be your entry point, and level 0 will be your stop loss.


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In figure 3, we have plotted the Fibonacci retracement tool with custom extension levels on a bullish pin bar , where the entry was the high of the bar and the stop loss was at the low of the bar. As you can see on the price chart, the extension level 2 served as the effective risk to reward ratio of 1 and extension level 3 served as the effective risk to reward ratio of 2. Using the Fibonacci retracement tool with these custom levels, you can easily visualize at what price level your trade will yield a specific risk to reward ratio. Pretty neat, right?

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It is not that difficult to master the idea of risk to reward ratio once you understand the basics of how it works. But, many professional traders tend to use risk to reward ratio a bit differently than some newer Forex traders. First, professional Forex traders generally do not always stick to any predetermined risk to reward ratio, which many popular trading books advocate.

These traders have taken the time to thoroughly backtest their preferred trading instruments to find out the historical win rate of their strategy based on various risk to reward ratios. Instead of fixating on a random risk to reward ratio like or , experienced traders tend to use extensive data analysis to define what risk to reward ratio is suitable for a given trading strategy. Furthermore, professional Forex traders understand that just setting a large profit target and small stop loss does not give them a valid reason to enter sub optimal trades.

Instead, seasoned traders judge each trade based on its own merit and only open the trade once all of their strategy criteria has been met.

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Regardless of how you calculate the risk to reward ratio, either by manually using an old-school calculator, or other preferred method, it is imperative that you take the time to access the risk vs reward prior to initiating any potential trade. Hence, I would suggest that first, you try to correctly understand the relationship between risk to reward with your particular trading strategy. Then, you should spend the required time conducting extensive backtests to find out the best risk to reward ratio for your particular method.

Once you find a suitable combination, calculate the respective required minimum win rate based on the risk to reward ratio, so that you can keep an eye on these metrics. Download the short printable PDF version summarizing the key points of this lesson…. In the example, assume for the sake of simplicity that 60 trades were winners and 40 were losers.

A win-loss ratio above 1. You might be winning, but if your losses are larger in value than your wins, you are still not profiting. You should consider your risk to reward ratio at the same time. Day traders want to be in and out of the market quickly, taking advantage of short-term patterns and trade signals. This typically means each trade will have a stop loss attached to it. The stop-loss determines how many cents, ticks or pips you are willing to risk in a stock, future or forex pair. Your profit target establishes your expected payoff.

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Your potential reward is therefore twice as large as your potential risk. Day traders must strike a balance between win rate and risk-reward. Consider one of the following strategies:. Winning more than that becomes increasingly difficult, with minor additional payoffs. Strive to make a bit more on winners than you lose on losers; ideally, wins should be about 1.

Your ideal mix will depend on your trading style.


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What is risk and reward in trading?

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