Risk-Reward Ratios for Daytraders
Trading the forex market successfully can be very intimidating since it requires extreme discipline and perfect execution of the plan. It often said that risk reward ratio factor is the number one element that day trader should take care before taking a trade.
The mystery behind successfully trading the forex market by the professional day traders lies between their strict money management policies. It’s imperative that every single trade executed in the market should have at least 1:2 risk reward ratio. This simple golden rule will make your trading career much more easy and stable.
Chart Example: Risk vs. Reward
Figure: Trading the EURJPY pair with excellent risk reward ratios
Professional day traders trade the signals which have at least 1:2 a risk reward ratio. If the trade setup doesn’t have minimum 1:2 risk reward ratio than it’s not executed in the real-time market. In the above figure, a perfect sell entry with classic risk-reward ratio booked a total profit of 600 pips.
That means after winning this trade if you have six consecutive losing trades with 100 pips stop loss, still you would be in a break-even position. Many new day traders fail to successfully trade the market only because they don’t follow proper money management system.
A Winning Daytrading Strategy
A winning trading strategy with a winning percentage of more than 70 % is bound to fail if money management system is not incorporated properly. On the contrary, the professional trader who has a trading strategy with a 50% winning ratio is successfully trading the market in the long run. They are losing more trades with small losses but winning few with the large profit.