Forex trading is in fact about probability. Traders who apply the calculation of therisk/reward ratio on any trading positions and carried out with discipline will get a consistent profit. We can freely choose any strategy to be applied in trading, but bysetting an adequate reward risk and very likely obtained a consistent profit despite thesetup of our trading strategy has not really mature. Application of risk/reward ratiogives traders an equal chance to obtain a consistent profit, therefore it could be saidthat the method of risk/reward is the ' holy grail ' in trading, and most major mattersbesides disciplinary factors and control of emotions.
Sets the level of risk and reward
The first thing that should be done in a trading strategy to setup the trader is to calculate the risk that dare to bear in order for realistic trading results.
When calculating risk and reward, traders often make mistakes with determine rewardin advance or setting a stop loss level that distance is too close to the entry level, which causes his strategy did not go well.
Based on the market prices to determine the probability of risk and reward, which need to be specified in advance is a risk, then the reward is calculated as multiples of the risk.To determine risk in advance, we would be more concerned at risk than reward to be gained.
Effective risk management will generate a consistent profit in trading. The level ofreward usually determined 1, 2 or 3 times of risk, so if we use a trailing stop method by shifting the stop level should also lossnya on the 1, 2 or 3 times from the level of riskwhich we have specified.
Some examples of the application of the level of risk and reward
The following example is the EUR/USD on the 1-hour chart. Looks a valid pin bar andconfirmed by daily resistance and bearish momentum that gives a strong signal for a sell position.
We give a horizontal line on the pin bar as the highest level of stop loss level, and ourstop loss level is above one pip 1.3656, highest level of pin bar. Our entry level at the lowest level when the impregnable bar pin (break), namely at 1.3611, one level below the lowest pip pin bar. Total risk = 1.3656-1.3611 = 45 pips. If we play with a minilot, or 1 pip = 1 $, then we risk was 45 $, not 45 pips.
Because we could have had a different position with a different lot, then it should beconditioned to calculate risk and reward in units of $ instead of pip, but gives a risk andreward on the chart with units of the pip.
As shown in the following figure, the levels we set the rewardnya on the 1, 2 or 3 timesof risk, i.e. on a 45 pip pip, 90 or 135 pips. Since we are trading with the 1-hour chart,signaling the price action that occurs, stop loss 45 pip is noticeably tighter than if we are trading with daily chart.
The following daily chart;/USD (silver). In conjunction with the bullish momentumformed fakey pin bar which gives a signal buy. The risk we set slightly below the level of the pin bar of 1.13 of the price difference or 113 points. Each level of reward on 1R (1 XRisk level), or 2R (2 X Risk level) or 3R (3 X Risk level). If we're trading in a mini lot, 1 pip= 1 $, so the total risk = $ 113, medium reward each at $ 113 (1R), $ 226 (2R) and $339 (3R). As shown in the chart below, the reward has been reached when the 3R, pinbar then formed which gives a sell signal.
Trailing stop
To obtain the optimal profit, trailing stop method we apply at each level of reward that we have set.
In this case we don't need to set a level exit on the level of rewardnya, but resetting thestop loss level at each level rewardnya if this level has been exceeded, so that would stillearn a profit if the price movement direction is still in accordance with the assumptionthat we have predicted that.
With this method we have to monitor the price movement so that the setting oftrailing stops can be applied. The way this right is applied to a trending market conditions with strong.
As an illustration, consider the daily chart EUR/USD to the following:
By applying the methods of the trailing stop, we could be setting a stop loss at the level of break-even that of $ 108 after price movements beyond level 1R. Prices continue to rise and when it has exceeded the level of 2R, stop loss level slid as low as $216 or 2R, and so on when the price has exceeded the level of 3R, stop loss level 3R orslid $ 324.
Thus the profit we gain will be a maximum corresponding movement of the trend, andif the price has exceeded the level of 3R, we are still possible to acquire profit or even4R 5R.
Risk/Reward methods generate a consistent profit
Ideally, we are setting the Risk/Reward ratio of 1: 1 or 1: 2 with usually at every position we have open, thus the average loss/profit ratio is 1: 2.
Therefore the Risk/Reward is said to be the ' holy grail ' in trading. If this method isreally implemented, will generate a consistent profit on our trading.
Such as the overall trading in the scenario, we lost 65% and 35% profit only, with theRisk/Reward ratio of 1: 2 and the amount of trade as much as 100, then we lose 65times and profit 35 times. Said loss per trade is $ 100, then our total loss = 65 X $ 100 = $ 6500. Because our reward 2 times or risk $ 200 so the total profit = 35 X $ 200 = $ 7000, and overall we still profit $ 500.
Mistakes made by traders is generally not disciplined in accordance with tradingexecution risk and reward that has been planned and defined in advance. If we are really to implement methods of risk/reward ratio with discipline at every position we have open, and accompanied by adequate trading strategies, then the application ofthe risk/reward ratio is actually the ' holy grail ' factor in trading.
Sets the level of risk and reward
The first thing that should be done in a trading strategy to setup the trader is to calculate the risk that dare to bear in order for realistic trading results.
When calculating risk and reward, traders often make mistakes with determine rewardin advance or setting a stop loss level that distance is too close to the entry level, which causes his strategy did not go well.
Based on the market prices to determine the probability of risk and reward, which need to be specified in advance is a risk, then the reward is calculated as multiples of the risk.To determine risk in advance, we would be more concerned at risk than reward to be gained.
Effective risk management will generate a consistent profit in trading. The level ofreward usually determined 1, 2 or 3 times of risk, so if we use a trailing stop method by shifting the stop level should also lossnya on the 1, 2 or 3 times from the level of riskwhich we have specified.
Some examples of the application of the level of risk and reward
The following example is the EUR/USD on the 1-hour chart. Looks a valid pin bar andconfirmed by daily resistance and bearish momentum that gives a strong signal for a sell position.
We give a horizontal line on the pin bar as the highest level of stop loss level, and ourstop loss level is above one pip 1.3656, highest level of pin bar. Our entry level at the lowest level when the impregnable bar pin (break), namely at 1.3611, one level below the lowest pip pin bar. Total risk = 1.3656-1.3611 = 45 pips. If we play with a minilot, or 1 pip = 1 $, then we risk was 45 $, not 45 pips.
Because we could have had a different position with a different lot, then it should beconditioned to calculate risk and reward in units of $ instead of pip, but gives a risk andreward on the chart with units of the pip.
As shown in the following figure, the levels we set the rewardnya on the 1, 2 or 3 timesof risk, i.e. on a 45 pip pip, 90 or 135 pips. Since we are trading with the 1-hour chart,signaling the price action that occurs, stop loss 45 pip is noticeably tighter than if we are trading with daily chart.
The following daily chart;/USD (silver). In conjunction with the bullish momentumformed fakey pin bar which gives a signal buy. The risk we set slightly below the level of the pin bar of 1.13 of the price difference or 113 points. Each level of reward on 1R (1 XRisk level), or 2R (2 X Risk level) or 3R (3 X Risk level). If we're trading in a mini lot, 1 pip= 1 $, so the total risk = $ 113, medium reward each at $ 113 (1R), $ 226 (2R) and $339 (3R). As shown in the chart below, the reward has been reached when the 3R, pinbar then formed which gives a sell signal.
Trailing stop
To obtain the optimal profit, trailing stop method we apply at each level of reward that we have set.
In this case we don't need to set a level exit on the level of rewardnya, but resetting thestop loss level at each level rewardnya if this level has been exceeded, so that would stillearn a profit if the price movement direction is still in accordance with the assumptionthat we have predicted that.
With this method we have to monitor the price movement so that the setting oftrailing stops can be applied. The way this right is applied to a trending market conditions with strong.
As an illustration, consider the daily chart EUR/USD to the following:
By applying the methods of the trailing stop, we could be setting a stop loss at the level of break-even that of $ 108 after price movements beyond level 1R. Prices continue to rise and when it has exceeded the level of 2R, stop loss level slid as low as $216 or 2R, and so on when the price has exceeded the level of 3R, stop loss level 3R orslid $ 324.
Thus the profit we gain will be a maximum corresponding movement of the trend, andif the price has exceeded the level of 3R, we are still possible to acquire profit or even4R 5R.
Risk/Reward methods generate a consistent profit
Ideally, we are setting the Risk/Reward ratio of 1: 1 or 1: 2 with usually at every position we have open, thus the average loss/profit ratio is 1: 2.
Therefore the Risk/Reward is said to be the ' holy grail ' in trading. If this method isreally implemented, will generate a consistent profit on our trading.
Such as the overall trading in the scenario, we lost 65% and 35% profit only, with theRisk/Reward ratio of 1: 2 and the amount of trade as much as 100, then we lose 65times and profit 35 times. Said loss per trade is $ 100, then our total loss = 65 X $ 100 = $ 6500. Because our reward 2 times or risk $ 200 so the total profit = 35 X $ 200 = $ 7000, and overall we still profit $ 500.
Mistakes made by traders is generally not disciplined in accordance with tradingexecution risk and reward that has been planned and defined in advance. If we are really to implement methods of risk/reward ratio with discipline at every position we have open, and accompanied by adequate trading strategies, then the application ofthe risk/reward ratio is actually the ' holy grail ' factor in trading.
Posted by Unknown on Sunday, February 1, 2015 - Rating: 4.5
Title : Risk/Reward Ratio Is The Holy Grail In Forex Trading
Description : Forex trading is in fact about probability. Traders who apply the calculation of therisk/reward ratio on any trading positions and carried o...
Description : Forex trading is in fact about probability. Traders who apply the calculation of therisk/reward ratio on any trading positions and carried o...
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