Risk-Reward Revisited

Filed under: Learn Forex Trading |

 

Over the past few months (since the beginning of October to be precise), I have been looking at taking a more conservative approach to my trading. I have been doing this by splitting my targets. I have been risking a cumulative total of 1% of my bank on each trade, but I have been splitting this 1% risk with two targets. The first target was at a risk-reward level of 1:1 (risking 0.7% of the bank), and the second target had a risk-reward level of 1:2 (risking 0.3% of the bank). Therefore, if the first target was hit, then I would be in a risk free trade with a guaranteed 0.4% profit, and if the second target was hit, a profit of 1.3% would be made. If the stop loss was hit before the first target, then a -1% loss would be made.

 

Since beginning this trial just over two months ago, 32 trades have been made, and my profit/loss figures are just slightly above breakeven.  However, without splitting my targets, I would be in profit by +5.71%.  Although this has been a much less stressful way to trade as the winning percentage is improved, it has proved to be much less profitable. I have begun to think that much of the value of this way of trading is actually in the risk-reward scenario, and as such, from now on, I will be trying to take a minimum RR of 1:2, and I will take scenarios of 1:3, 1:4, and even 1:5 where a logical level permits.

 

I recently took a logical risk-reward scenario of 1:3.5, and this came off very nicely for a 3.5% rise on my bank. These are the kind of profits that really kick things on and give you some breathing space. Now, if I can be a little pickier about my trades and keep a good RR scenario on each trade, then I think 2013 will be very profitable indeed.

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