News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
More View more
Real Time News
  • Traders utilize varying time frames to speculate in the forex market. The two most common are long- and short-term-time frames which transmits through to trend and trigger charts. Learn more about time-frame analysis here: https://t.co/9S5tXIs3SX https://t.co/eKemHgd2xD
  • House Committee on Rules to meet Wednesday at 10 am ET to advance debt limit extension - BBG
  • Japan's government pension investment fund (GPIF) will not include Chinese sovereign debt in portfolio Nikkei via BBG
  • The US Dollar continues to push higher against ASEAN currencies after the FOMC rate decision. This leaves the USD/SGD, USD/THB, USD/PHP and USD/IDR outlook mostly tilted higher.Find out from @ddubrovskyFX here:https://t.co/zn56iTFBxM https://t.co/bzCqq5pKdY
  • China's Evergrande Group reported to sell stake in its regional bank for near $1.5 billion - BBG
  • Update on #Cryptocurrencies #BITCOIN -1.84% #BITCOINCASH -2.03% #ETHEREUM -1.84% #RIPPLE -2.13% #LITECOIN -2.44%
  • Will be covering the Japanese #Yen to see how retail positioning could shape the outlook for $USDJPY, $AUDJPY and $EURJPY Starting in about 30 minutes! Signup for the session below: https://t.co/afqne77wU6
  • Join @ddubrovskyFX at 20:00 EST/00:00 GMT for a webinar on what other traders' buy/sell bets say about price trends. Register here: https://t.co/AzOQioRZER https://t.co/h2DAnqnY7J
  • #BlackRock: We are neutral U.S. equities. We see U.S. growth momentum peaking and expect other regions to be attractive ways to play the next leg of the restart as it broadens to other regions, notably Europe and Japan $SPX $NDX
  • #BlackRock: The new nominal theme leads to a steeper yield curve expectation than market pricing. We see yields rising gradually, keeping us broadly underweight government bonds, particularly for longer maturities #trading $TLT
Risk Reward Ratios for Forex

Risk Reward Ratios for Forex

Walker England, Forex Trading Instructor

Article Summary: Before placing a trade, traders should look to contain their risk. Learn the benefits of using Risk/Reward ratios for Forex.

Its inevitable that a new trader will want to dive in head first into the market, and immediately enter into their first Forex trade as quickly as possible As tempting as this may be, more often than not, traders will also forget the risk management aspect of their tading idea. Proper risk management is imparative to any trading plan, and allows us to know exactly where we whish to exit the market in the event that price turns against us. Today we will focus on the first step of risk management through better understanding Risk/Reward ratios.

Learn Forex –EURGBP 4HR Range

Risk Reward Ratios for Forex

(Created using FXCM’s Marketscope 2.0 charts)

So what exactly is a Risk/Reward ratio and how does it apply to Forex trading? First, a Risk/Reward ratio refers to the amount of profit we expect to gain on a position, relative to what we are risking in the event of a loss. Knowing this ratio can help traders manage risk by setting expectations for the outcome of a trade prior to entry. The key here is to find a positive ratio for your strategy. This way we increase the margin of profit when we are right, relative to the amount we lose if were wrong. Let’s look at an example of a positive Risk/Reward ratio using the EURGBP chart above.

Above the graph depicts a sample range trade on the EURGBP 4Hour chart. Traders looking to trade a trade this range would expect to enter the market off overhead resistance near .8575.When setting exits on a range trade, stops should always be set outside an indicated level of support or resistance. In this example stops are set above current resistance near .8625. In the event price breaks through the depicted range, we would be expecting to lose 50 pips on this trade. To create a 1:2 Risk/Reward ratio we would then need to make at least twice as much in profit on the position placing limit orders near support at .8475. Now that your now more familiar with Risk/Reward ratios let’s see exactly why they are so important.

Risk Reward Ratios for Forex

From The Number One Mistake FX Traders Make by David Rodriguez

Understanding these ratios can actually help individuals avoid the number one mistake that traders make. After sifting through over 12 million trades, FXCMs analysts were able to calculate that while most trades are closed at a profit, losses still far exceeded profits due to traders risking more on losing positions than the amount gained from a winner. This statistic shows that most traders are using a negative Risk/Reward ratio which requires a much higher winning percentage to compensate for their losses. In the graph above, we can see that the average profit on the EURGBP is only 30 pips, while the average loss is closer to 51.

The easy way to avoid this scenario is to use at minimum a 1:2 Risk/Reward ratio, as mentioned in our example. This maximizes profits on winning trades, while limiting losses when a trade moves against you. By risking 50 pips to make a reward of 100 pips in the trade above, we are effectively inverting these statistics in our favor. Meaning now, we only need to have one winning trade for any two given losers to be break even to net profitable on our trading account.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES