Risk and Reward

This question is very difficult to answer in a precise way, as it does not have an exact answer. Hence, the question of risk and reward always changes with the circumstances of the moment. The traditional ration is 2:1 risking half the amount of pips as you are trying to make. So if your profit aim is 100 then your stop would be around 50.

Theoretically, it sounds like a fantastic plan. You just need to be right four out of 10 times to make money. However, no trader put this basic principal in real practice. I have read various views in this regard from analysts, trading gurus and whole host of others who have never risk so much money on trade. I have never seen anyone who actually makes living from the market employ 2:1 risk reward ratio.

Might be thinking why?

The basic reason behind this is that most people who trade do not give importance to such things they believe there is no such things in the market. In fact, market does not respond according to the goals. Just imagine a trade where you risk 100 points with a profit target off 200 points. At the start, trade moves in the favor and touches 199 points. However, you waited the profit to touch mark of 200 points but guess what? The forex market all of a sudden falls. It could be a nightmare where positive turns negative in a matter of minutes. What is your loss? On paper you loss 100 points but actually your loss is 299 points. This is what can happen in real trading. Theoretically 2:1 risk reward is far more elusive then you imagine.

Profit cannot be predicted in the market. The only thing you can control is risk. That is why we always trade with two units. That is why we always take short target and attentively control risk by trailing our stops. It may not be stunning but that the only way to cope up risk and reward.