Traders that follow one simple rule are 3. The critical feature of profitable traders is their reward to risk ratio.

FXCM studied 43 million real trades from traders around the world to produce this analysis. The good news is that the real percentage is noticeably lower. I cannot promise you that based on the data that using reward to risk ratios greater than 1 will automatically give you odds of being profitable in the long run. Logic, however, suggests that using good reward to risk ratios is a good idea. The advice to use reward-risk ratios above one appears in every trading book ever written for a good reason.

Instead, a large ratio discourages the worst mistakes that traders make. I remember a project when I worked as a broker at FXCM. Perhaps taking the opposite signal of the worst traders might lead to profitable trades? Alas, we found something far more mundane: Think about how trading costs apply to the reward risk ratio. Traders using a 2: Even though FXCM offers low spreads and commissions, a 2: Longer pip distances lower the cost of every pip of profit.

FXCM averages a 1. Your cost as a percentage of profit in these examples are 5x higher when you scalp. Holding trades with bigger profit targets minimizes the impact of trading costs.

Said another way, you get to keep more pips when you win by increasing the distance of your profit target from your entry price.

Following a reward risk ratio greater than 1 naturally pushes you towards lower trading costs.

Lowering your trading costs logically suggests you have a higher likelihood of long term profitability. The reward risk ratio compares your average profit to your average loss. The high frequency trading firm Virtu is a great example of this. Virtu wins on Smart business owners know that finding more customers is time consuming and expensive. It works the same way in trading.

Instead of worrying about winning more often, you should focus your efforts on squeezing a few extra pips out of your winning trades. You do not need more winning trades to do better.

The type of strategy that you select almost automatically alpari binary options strategies explained your reward risk ratio. If you daytrade EURUSD where the daily range has recently been around 80 pips, then that 80 pip range is the hard ceiling of what you could possibly make in a day.

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You know from experience that getting the bottom tick or the top tick of the day almost never happens. Upon alpari binary options strategies explained, you also need to give the trade breathing room.

The best exits in a ranging market occur in the middle. It has just as much chance as going back to support and it does up to resistance. That only gives you a potential range of profit targets from pips. The most realistic, good ratio is a 30 pip profit target on a 25 pip stop loss, which is 1. Most strategies will probably how to get money in bubble safari 40 pips to make 20, which is a ratio of only 0.

Consider what a range trading strategy is. The market is stuck. You should only range trade if you have a well researched strategy with a long term edge. Trend trading strategies should last for weeks or months at a time.

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Looking again at EURUSD on a multi-month time frame, the current long term range is from 1. Instead, it gets stuck nearthen briefly pushes down. It comes back to 1.

It might push up again to 1. Better long term plays are to sit on trades and let them pick a direction. The best recent EURUSD example began on May 8, at 1. The natural risk reward ratio for these types of trends is astronomically high.

For a few hundred pips of risk, you can make 10 or more pips for every one risked. Posted on June 21, by Autochartist wrote in Autochartist Blog.

It has 0 Comment. Trading costs Think about how trading costs apply to the reward risk ratio. Cost examples FXCM averages a 1.

Reward risk ratio explained The reward risk ratio compares your average profit to your average loss. Types of strategies with good reward risk ratios The type of strategy that you select almost automatically dictates your reward risk ratio.

Ranging strategies If you daytrade EURUSD where the daily range has recently been around 80 pips, then that 80 pip range is the hard ceiling of what you could possibly make in a day. Trending strategies Trend trading strategies should last for weeks or months at a time.

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