7.1 How to use and calculate risk/reward ratio for trading Video Lecture | Forex: Learn and Master Trading (English) - Business Basics

welcome back to capex forex trading comm
in this video we're going to discuss the
risk reward ratio because this is
something that every trader needs to
include within their money management
techniques now you may know of have
heard of traders who generate more
winning trades than losing trades but
still lose money so their wins tend to
be constant and frequent and are usually
the same amount in every single trade
but then a single loss takes out either
two or three of their winners and in the
end they end up on in a losing position
for the day now one of the reasons for
this could be that the risk reward ratio
is not correct so what is risk reward in
terms of its definition the risk is
obviously the amount of money you're
willing to risk within a trade and the
reward is the potential profit target
that you're aiming to get so in terms of
the ratio between the two what is
recommended well professional traders
recommend a risk reward ratio of one to
three so this means that your reward is
three times the amount of that risk so
basically if you lose once you still
have another to trade worth of winnings
to rely on in reality a good risk reward
ratio to use is one to two so your
reward is double of the risk that you're
willing to put up in the market so in
terms of our calculation the only thing
that we need to do is divide the reward
by the risk to see what ratio is
relative to our trade so let's say for
the sake of the argument that our reward
or a potential profit target will
provide for us $100 the risk that we're
putting up is $50 so if you divide 100
by 50 the answer is 2 so our risk reward
ratio is 1 to 2 so that means that our
reward is double compared to the risk
that we're looking to put up in the
market so let's look at a risk reward
ratio example in our chart so the area
that we're looking at is here okay so
what we're looking for is an entry
just a few pips above this high here and
our profit target is somewhere that's
relative to this previous high so let's
just define those by a horizontal line
so we got our entry here which has been
hit by this candle and our profit target
is just a few people oh the previous
high which is here which is obviously
been hit but this long white candle now
our risk or our stop loss is going to be
just a few pips below this low here so
we're going to take a horizontal line
again and just put it a few pips below
that previous low now you can see with a
naked eye that our reward which is this
area here is almost double the size if
not double the size of our risk area
which is here so we have two areas the
reward area and the risk area so in
terms of our calculations let's say that
our profit target would generate $100
when it reaches this profit line here
and unfortunately if our stop loss is
hit we will lose $50 and our stop loss
line is here now if we do this on every
single trade all we need is one win out
of two to basically be in a profit
making position so that concludes this
lesson if you have any questions or
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we will see you for the next lesson
thanks