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Why a 1:1 Risk Reward Ratio is best for forex trading

Updated: Feb 6, 2019



Although trading with a 1:2 risk reward ratio or higher is common, it is a hard way to make consistent profit as it results in a higher chance of hitting stop loss than take profit. The diagram above shows a hypothetical 1:2 Risk Reward Ratio with Take Profit at +20 Pips, Stop loss at -10 Pips. We will assume there are no spreads and no commissions and that twenty BUY trades have been placed randomly.

Of the twenty trades placed, 50% of them will hit stop loss, resulting in -100 pips. 25% of the trades will go up by 10 pips and then return to zero resulting in 0 pips. 25% of the trades will hit take profit resulting in +100 pips total. In summary:

WITH A 1:2 RISK REWARD RATIO ONLY 15/20 TRADES PLACED RESULTED IN EITHER A PROFIT OR A LOSS. 5 WERE IN PROFIT (5/15 = 33%) 10 WERE AT A LOSS (10/15 = 66%).

We can conculde from this that using the 1:2 risk reward ratio, trades have a 33% chance of reaching Take Profit. (Assuming no spread or commission)



In exactly the same scenario but with a 1:1 Risk Reward Ratio as shown in the diagram above of the twenty trades placed, 50% of the trades will hit stop loss, resulting in -200 pips and 50% of the trades will hit take profit resulting in +200 pips total. In summary:

WITH A 1:1 RISK REWARD RATIO ALL 20/20 TRADES RESULTED IN EITHER A PROFIT OR A LOSS. 10 WERE IN PROFIT (10/20 = 50%) 10 WERE AT A LOSS (10/20 = 50%).

We can conculde from this that using the 1:1 risk reward ratio, trades have a 50% chance of reaching Take Profit. (Assuming no spread or commission)

#forex #scalping #riskreward


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