Risk-Reward Ratio
Always look for trades with a good risk-reward ratio.
- What's a good risk-reward ration – you may ask. - That's a good question! Ideally, aim for at least a 1:2 ratio, meaning you’re willing to risk $1 to potentially make $2. This helps ensure that your winners can cover your losers and still leave you with a profit. For day trading and scalping, it should be even more: at least 1:3.
Exercise
Objective: identify trades with a favorable risk-reward ratio.
Scenario: you’re eyeing a trade on USD/JPY. You’re willing to risk 100 pips to potentially make 300 pips.
Steps:
Set risk level. decide your stop-loss 100 pips below your entry point.
Set reward level. set your take-profit order 300 pips above your entry point.
Enter the trade. place your buy or sell order with these parameters.
Check ratio. ensure the risk-reward ratio is 1:3 before entering.
Monitor. track the trade to see if it meets your risk-reward expectations.
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