Risk to reward ratio is determined by using the stop loss and target profit values.
Divide the amount you are willing to lose by the amount expected to earn when you close your position.
The simplest way to calculate risk reward ratio is by dividing stop loss (SL) pips by take profit(TP) pips.
All these differ with different strategies and timeframe with the trade signals. This means the SL and Tp pips on a bigger timeframe are much more than those on a small timeframe.
Let’s look at the trade below on the AUDCAD daily chart below with a cup and handle pattern
From the above example;
Stop loss pips = 87 pips, Take profit pips = 357pips
Therefore, Risk reward ratio = 87/ 357 = 1/4 ie 1:4
You must always take trades that atleast have a Risk Reward ratio of atleast 1:2. A good risk reward will profit you even when you undergo several losses. You should be able to make money over a series of trades even if you lose majority of them.
In our next lesson, we will learn how important risk reward ratios are! And how much significant they are to profitable successful trading.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...