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.

Free Trading Guides
EUR/USD
Bearish
GBP/USD
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
USD/JPY
Mixed
Gold
Mixed
Oil - US Crude
Mixed
Bitcoin
Mixed
More View more
Notice

DailyFX PLUS Content Now Available Freely to all DailyFX Users

Real Time News
  • Central bank independence has several advantages. Find out what they are in detail with @MartinSEssex here: https://t.co/wVFXbbTxf1 https://t.co/cQQmuH8biQ
  • The US Dollar remains in consolidation mode against the Philippine Peso and Indian Rupee. Will the Singapore Dollar weaken as $USDSGD rising support holds ahead? Find out from @ddubrovskyFX here: https://t.co/HZ8Loqj3Ey https://t.co/6PCFkdj3ka
  • Follow @DailyFXedu for your regular #webinar updates with @DailyFX analysts and catch up on the webinars you missed. https://t.co/Da10QUg9r1
  • Greed has proven to be a hindrance more than assistance for traders. How does greed lead to #FOMOintrading? Find out from @RichardSnowFX here: https://t.co/aT8TZjlFqP https://t.co/Le8Qx6OOwV
  • $GBPUSD at the moment break-even straddles = 152pips meaning that for option traders to realize gains, the spot price must see a move greater than 152pips. Get your market update from @JMcQueenFX here: https://t.co/odj2lLRrGf https://t.co/RXCBwHGluG
  • $EURGBP has fallen over 6% since August and is now rapidly approaching a critical support level not reached since May. Will a break below accelerate the aggressive selloff? Find out from @ZabelinDimitri here: https://t.co/CBM8Fg7vM0 https://t.co/0yDnEpzQqR
  • The #Euro is struggling for direction against the US Dollar but the near-term downtrend guiding it lower since late June remains firmly intact. Where is $EURUSD heading? Get your technical analysis from @IlyaSpivak here: https://t.co/us6AINmuoe https://t.co/J4hQtyprYf
  • $DXY & $SPX500 hold steady after #FED rate cut. Get your update from @JohnKicklighter here: https://t.co/vqXlKCMDYA
  • Dow Jones & Dax 30 levels to watch ahead of the fed from @PeterHanksFX here: https://t.co/iUIrsygKz2
  • The politics of the US and UK may be starkly divided but their grip on the vast, $6.6 trillion global foreign exchange trade seems as tight as ever. Get your market update from @DavidCottleFX here:https://t.co/xTKHOvrIqg https://t.co/vtHhdnF82Q
Risk Reward Ratio Validation

Risk Reward Ratio Validation

2011-12-08 23:01:00
Richard Krivo, Trading Instructor
Share:

In our Money Management webinars we mention that a significant aspect of the rules is to always trade with at least a 1:2 Risk Reward Ratio (RRR) in place. A key aspect of this is how is a trader to know that the currency pair at least has the potential to move far enough to make the RRR valid.

Let’s take a look at the Daily chart of the EURNZD below…

Risk Reward Ratio Validation

Trade Rationale:

At the time of this chart we can see that the bias on the pair is bearish as the pair is trading below the 200 SMA and the Strong/Weak analysis showed that the EUR was weak and the NZD was stronger. As such, we would look for technical opportunities to short the pair.

Price action has been stalling just above support around 1.7080…the green line labeled Enter. Should price action take out that support level, 1.7080 or, better yet, CLOSE below that level, a trader could short the pair with a stop just above some of the recent consolidation…the red line labeled Stop.

Since our stop would be around 1.7295 and our entry was at 1.7080, the risk we are taking on the trade is 215 pips…the distance between our entry and our stop. Now let’s bring our 1:2 RRR into play. Since we are risking 215 pips we need to have a realistic potential of gaining 430 pips on the trade…twice the amount we are risking.

As we look at the chart again, since there is virtually no support between our entry and our limit, we see that we have a potential gain of 590 pips…the distance between our entry and the next level of support on the Daily chart. As such this trade more than meets the 1:2 Risk Reward Ratio requirement.

In fact, the RRR on this trade is 1:2.7.

(However, keep in mind that even though the pair legitimately has the room to move around 590 pips, does not mean that it actually WILL move 590 pips. Nothing in trading is guaranteed.)

Next: How Effective Leverage Affects Forex Profitability (41 of 48)

Previous: Arriving at a Risk/Reward Ratio

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

DISCLOSURES

News & Analysis at your fingertips.