What is the Best Risk and Reward Ratio?
What do you think is the best Risk and Reward Ratio on the Forex market?
The truth is that whatever the ratio of Stop Loss to Take Profit you choose, trading efficiency will not change.
It doesn’t matter whether it is 2:1, 1:1, or 1:3.
If you always open trades based on the specific ratio of SL to TP, it will not bring you any additional profit or loss.
Take a look at this simple table:
Depending on the ratio, the number of winning and losing trades will change. However, if you multiply this number by the result of a trade, you'll get a zero in the end.
So, what's the conclusion here? There is no best risk reward ratio in Forex trading.
What Else is There to Know?
Any trade consists of two components: the market entry and the market exit. Proper use of each component increases the profitability of your trading system as a whole.
So, by using the fixed ratio of Stop Loss to Take Profit in Forex (SL&TP), you neutralize the potential of the second component (exit from a trade). Simply put, you enter a trade with a signal and exit it at random.
To benefit from the potential of the second component, SL and TP must be set deliberately, taking into account the market situation.
Ideally, Stop Loss order should be set at such a level, where the price will keep moving after the order is triggered, and it won't immediately reverse. The opposite is true for Take Profit order: it must be set at the supposed reversal point. An indicator that can help you with this is StopLossClusters.
Of course, this effect cannot be achieved in practice, but it’s something to strive for. Please mind that this doesn’t mean that you have to catch the price movement from its high to its low, this means that you have to trade from entry signal to exit signal.
Take a look at this trade as an example:
Does the ratio of SL to TP matter in this case? No, it doesn’t make any difference. We can set the ratio to 1:10, and we can set it to 10:1. It all depends on the market situation.
There are 2 useful techniques that will show you how to set Stop Loss and Take Profit properly.
So, the main idea is: set SL and TP where it's required by the market situation and don’t mind their ratio.