What is the Recommended Risk/Reward Ratio in Forex Trading?

The best risk/reward ratio in forex trading can be 1:3 or 1:5. This  risk/reward ratio is achievable when the market trends after forming a too strong trade setup, and you succeed to enter on time. In most cases you should be able to hit the top and bottom of the trends, no matter on what time frame you trade. Or if you enter at the middle of the way, the trend should be strong enough to give you another big movement and make a profit which is 3 or 5 times bigger than your stop loss. You can do that. Why not? But there are just a few problems: 1. Markets form a trend in less than 30% of the cases; 2. Some trends are not strong enough that if you enter with delay and while they are at the middle of the way, they can hit your target which is 3 or 5 times bigger than your stop loss. 3. There are many cases that you miss the trends; you hesitate to enter and so you miss the chance; you think you have found a trend whereas you are wrong and it returns and hits your stop loss and… . So you lose in many trades, because you want to catch a big one.

So in reality, you have to lose in many trades, or have many of your trades closed at breakeven by the stop loss (because you will have to move the stop loss to breakeven when you are in a special amount of profit), or not to trade for such a long time waiting for a strong trend, until you can have a 1:3 or 1:5 trade.

How is it possible to catch a 1:3 or 1:5 trade without losing so many other trades?

If you take a position with 1:3 or 1:5 stop loss to target ratio and then you wait for it to hit your stop loss or target, you will have so many losing trades before having a winning trade. The reasons are mentioned above.

One solution is in moving the stop loss. You should not let your stop loss remain at its initial position. To have a 1:3 trade, the distance of your entry and your final target should be splitted into 3 parts (at least), while each part is equal to your original stop loss value. For example if you have a 50 pips stop loss, you should have a final target for 150 pips which should be splitted into three 50 pips levels. Then you should move your stop loss in three stages (in this example I assume that you take a 3% risk in each trade):

1. If the price reaches to the first 1/3 level, you should move the stop loss to breakeven. At this stage, if the price goes against you and hits the stop loss, you will get out without any profit/loss, BUT you should consider that you had an initial risk of 3%.

2. If it reaches the 2/3 level, you should move the stop loss to 1/3 level. At this stage, if the price goes against you and hits the stop loss, you will get out with a profit which equals your initial risk. For example if your stop loss has been 3% of your account, you will get out with a 3% profit. Therefore, such a trade will be ended as a 1:1 risk/reward trade.

3. If it becomes so close to the final target, you should move the stop loss to 2/3 level. Then you have to wait until it hits the final target or returns and hits the stop loss. At this stage, if it goes against you and hits the stop loss, you will get out with a profit which is twice of your initial risk. For example if your stop loss is 3% of your account, you will get out with a 6% profit. Therefore, such a trade will be ended as a 1:2 risk/reward trade. If the price hits the final target, your trade will be closed with a 9% profit and so you will have a 1:3 risk/reward trade.

So, to have a 1:3 trade, you will have some -3% trades which are those trades that hit the stop loss at its initial position. You will also have some 0% trades that are those trades that hit the stop loss at breakeven. Some of your trades will be +3% trades which are those that hit the stop loss at 1/3 level. Some will be +6% trades which are those that hit the stop loss at 2/3 level. And finally, some trades will be +9% trades which are those that trigger the final target.

Another solution is in taking the too strong trade setups on the long time frames like daily, weekly and monthly. If you wait for the too strong trade setup, they are usually strong enough to move the price for hundreds of pips, and so you can have wide targets.Read more 

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