assuming you still implement a risk reward. This is a solid trailing technique because you are securing profits while at the same time leaving the trade open for a possibility at it running further in your favor. 20 pip risk/ 5 pip reward 4:1 Risk/Reward Ouch! Using the Risk Reward Ratio, traders often use risk reward ratio criteria to help them place stop loss orders and also when assessing how large a position to take. Well, while in the short to very-short term this may be true, in the long run it is not helpful.
By taking a profit of less than 2 times risk, you are basically purposesly putting the odds against you, because you then will have to win over 50 of your trades to make money, and most trading strategies do not give you an edge that. They can also take on larger trades when a higher probability of success is anticipated, perhaps using the risk reward ratio as a criterion for doing. This will stabilize the equity curve and allow you to sleep easier at night. Basically, having your risk be less than your potential reward on prospective trades is one of the recipes for successful money management over the long term when trading forex. Also compute the potential financial rewards that you hope to earn from forex trading. How risk / reward can make you a consistently profitable forex trader. Many traders make the mistake when trailing stops of not properly locking in profits, there is nothing worse than letting a winning trade come all the way back to your entry point because you didnt lock in 1 or 2 times your risk. In your quest for that holy grail trading system, if you should ever so happen to find it we can guarantee you it would deploy a robust and powerful risk/reward model. Realistic Ratios for the Forex Market. Basically, after performing a probability-weighted risk/reward assessment for your forex trading business, you should see a substantially higher chance of success, preferably by a factor of at least two, than your chances of loss. Of course, once a trade is entered, any changes to the stop loss or take profit levels, perhaps using the technique of trailing stops will change the risk reward ratio of the position.