Forex Risk-Reward Folly
Posted: Tue Sep 08, 2009 7:06 am
Hello Edward,
I have read your set of notes on risk-reward ratio, and wish to compliment you on the most illustrative explanation on the topic available to newbies.
All traders have been told to establish risk management plans incorporating the risk-reward ratio enabling traders’ hard-earned money and expensive time in exchange to profits. Different professional traders recommend risk-reward ratios ranging from 1:2 to even 1:4. My opinion is that risk-reward ratio is arbitrary and depends upon the risk level one willing to take in conjunction with the profit target.
It is interesting to note that the larger the ratio is the greater reward the traders enjoy. However, I wonder how many traders follow strictly to the planned risk-reward ratios they formulated, because the outcome can be disastrous in a short period of time.
I am an intraday trader and find it extremely difficult to maintain the risk-reward ratio precisely. Taking a reasonable 1:2 ratio, and if I set the tight Stop Loss (SL) at 20 pips and take profits Limit (TP) 40 pips away, there is a strong likelihood the SL be strike first BEFORE the TP is reached under normal trading circumstances. Total loss comes to 60 pips painfully. However, the scenario is different on high performance trending situations.
The other side of the coin is to set the ratios to 1:3 or 1:4, but then one has to wait longer making the trade profitable, not forgetting the trend may stall, and reverses at its convenience to my disadvantage. Through my newbie trading experience, markets do everything possible to frustrate my goals. Sometimes I wonder whether the risk-reward concept is a Forex trading “folly” or a mathematical paradox.
Could you please advise as to how best in tackling the risk-reward ratio principle from a practical perspective.
Regards.
George FXtrades
I have read your set of notes on risk-reward ratio, and wish to compliment you on the most illustrative explanation on the topic available to newbies.
All traders have been told to establish risk management plans incorporating the risk-reward ratio enabling traders’ hard-earned money and expensive time in exchange to profits. Different professional traders recommend risk-reward ratios ranging from 1:2 to even 1:4. My opinion is that risk-reward ratio is arbitrary and depends upon the risk level one willing to take in conjunction with the profit target.
It is interesting to note that the larger the ratio is the greater reward the traders enjoy. However, I wonder how many traders follow strictly to the planned risk-reward ratios they formulated, because the outcome can be disastrous in a short period of time.
I am an intraday trader and find it extremely difficult to maintain the risk-reward ratio precisely. Taking a reasonable 1:2 ratio, and if I set the tight Stop Loss (SL) at 20 pips and take profits Limit (TP) 40 pips away, there is a strong likelihood the SL be strike first BEFORE the TP is reached under normal trading circumstances. Total loss comes to 60 pips painfully. However, the scenario is different on high performance trending situations.
The other side of the coin is to set the ratios to 1:3 or 1:4, but then one has to wait longer making the trade profitable, not forgetting the trend may stall, and reverses at its convenience to my disadvantage. Through my newbie trading experience, markets do everything possible to frustrate my goals. Sometimes I wonder whether the risk-reward concept is a Forex trading “folly” or a mathematical paradox.
Could you please advise as to how best in tackling the risk-reward ratio principle from a practical perspective.
Regards.
George FXtrades