[Mike Swartz] Forex Trading Strategy: Reward to Risk Ratio
The Holy Grail In Forex Trading may not be as one would think. Most traders or newbies would like to believe there is a secret set-up, indicator or piece of software that would make them money hand over fist. The truth of the matter is that in trading regardless if you are trading Forex, Stocks, Options or Futures the there is NO holy grail is those terms, but I consider good reward to risk ratios as good as it gets regarding a holy grail.
I will give you a quick example of this. Let’s say that you place ten trades and your trading strategy produces a win rate of only 40% with a 1:1 reward to risk ratio you would have a losing trading strategy, however with a 2:1 reward to risk ratio or even higher that same trading strategy could be very profitable.
Example: Trader A risk 1% per trade and attempts to make 2% per trade this would be a 2:1 reward to risk ratio. That same ten trade sample size we used just moments ago would produce a gain of 2% only winning 4 out of those ten trades.
Example: Trader B risks 1% per trade and attempts to gain 1% per trade from his wins this would be a 1:1 reward to risk ratio. That same trade sample size of 10 trades where trader b also only wins 4 out of those ten trades would have an adverse effect on the account balance of -1%.
In the two examples list above both traders only were right 4 out of 10 trades, but only one of those traders were profitable. So many traders wonder why they can’t seem to produce profits on a consistent basis and most of the time it boils down to 2 very basic concepts. The first is they simple trade to large of a position size for their account size trying to grow their account too fast. The second most common mistake is they use a negative or even reward to risk ratio when trading. Newer traders seem to focus entirely way too much on their win/loss ratio rather than be profitable. Sometimes it would be better to lose the same amount of trades as you win or even less than you win if it would help grow your account balance. Stop looking for the holy grail when trading Forex or other trading vehicles and focus on a positive reward to risk ratio.