What is Risk to Reward Ratios?
The risk to Reward Ratios are ratios of the anticipated risk of loss if a trade is lost to the anticipated reward of profits if a trade is won, both from an entry point.
These ratios have a wide application by traders trading Forex on Olymp Trade.
The risk to Reward ratios must be reasonable in that you risk less than you anticipate to earn.
What that means is that your reward can only be reasonable if it outweighs the risk.
A Risk to Reward Ratio of at least 1:2 is reasonable while higher ratios can also be used depending on the trade set up.
When you use Risk to Reward Ratios in your trade analysis on Olymp Trade, you are not only Taking Profits but doing it for many other reasons.
The risk to reward ratios of taking profits also help in: –
Planning Every Trade.
We have said time and again that you should never enter unplanned trades.
If you do, you are less better than a gambler because truth is, you will be jeopardizing your capital without surety of if you will win it back.
The risk to Reward ratios is a way you can plan your trades because you get to project how much of your capital to risk, where to enter into the market, and how much return to expect.
You must always remain rational and objective in making trading decisions. That way, you will save a lot of your capital by making rational trading decisions and taking only the trades that are well thought out.
The risk to reward ratios actually helps you to remain rational in your thinking.
This is by specifying how much your risked amount should relate to the anticipated gains.
Determine Entry Points.
Once you spot a tradable trade set up, you then need to apply proper risk to reward ratios. One very important aspect is that your risk to reward ratio can only be fulfilled if you enter the trade at a specific point.
If you miss the point and enter late, then your projected risk to reward ratio may not work.
Early entry may also be a deception and thus a reason for your risk to reward ratio to perform poorly.
We mentioned that the amount to be risked and the amount to be gained are with respect to the entry point.
What that means is that a proper risk to reward ratio must not only project risk and reward but also specify the point of entry into the trade for success.
Determine Possible Loss.
One of the obvious reasons for use of risk to reward ratios is their capacity to project how much you stand to gain given a constant amount to be risked.
Depending on how much you intend to gain from the forming trade set up, you will adjust that constant (possible loss/ amount to risk) accordingly.
In so doing, you realize that the use of a risk to reward ratio has actually come through for you in determining what amount you need to risk in order to earn your projected profit.
As you go about determining your possible loss or the amount to risk, remember to stick to your risk appetite without going far beyond.
Only risk what you can afford to lose.
Determine Possible Profit.
We’ve already mentioned that one of the obvious reasons for use of risk to reward ratios is their capacity to dictate how much you stand to gain given a constant amount to be risked. If your risk to reward ratio is at 1:2, you project your profit at 20 pips if you risk 10 pips and so on.
You can see that it actually becomes so easy to determine how much profit you expect even before you enter a trade if you use risk to reward ratios for that reason.
Remember to use a reasonable risk to reward ratio depending on the trade set up – at least 1:2 or higher.
Pick the Right Signals.
Your capacity to profit from the asset market is pegged on your ability to pick the right signals.
If you pick the wrong signals then the results are obvious that you have higher chances of loss than profit.
How on earth is a risk to reward ratio supposed to help you pick the right signal? Very easy indeed.
You have just spotted a trade set up which has the qualities of being profitable. Except, if you try to project the amount of profit you will get from such a setup, it falls below the minimum risk to reward ratio of at least 1:2.
You have done everything like considering your entry, your amount to the risk, and the like, but still, your profit doesn’t double your risk.
Tell me honestly, will you still go ahead to risk your 10 pips to get anything less than 20 Pips?
I bet you won’t!
Ignore that signal and look for better setups.
Only go for trade setups that offer you at least double your risked amount.
Avoid Emotional Attachment to Trades.
Applying risk to reward ratios helps you to emotionally detach from what is bound to happen to your trades.
You only pick trades that meet your desired risk to reward ratio and project your gains or possible loss based on that.
Doing so also ensures that you are not reacting emotionally – in greed to project so huge unreasonable profits or in fear to project so little amount to risk.
Have you been avoiding the use of risk to reward ratios in your trading on Olymp Trade?
Now you have more than enough reasons to apply such ratios in making your trading decisions. Happy Trading.