Risk to reward

Your R/R ratio is the second most important element of forex money management next to your account leverage. Risk and reward relates naturally to the sizes of the stop (SL) and take profit (TP) levels. The main rule of thumb is that clearly it is not financially sound to be risking more than your expected return on investment (ROI). Therefore it is far better to have a ratio at least if not larger than 1:1.

The most common ratios are 1:2, 1:3 and possibly 1:4 risk to reward. Beyond this is way too big. What will determine the TP would be:

1. Your style of trading such as short term verses long term i.e. Scalper/day trader or longer.
2. Particular currency pair. As we know by using the 'average true range' (ATR) indicator which gives us a clue as to what to expect in movement on any given time frame (TF).

What it boils down to is:

1. You do not want the trend to exhaust and reverse then potentially taking out your SL, or being stuck in a trade longer than is necessary. For me personally most of the time I trade the D1 TF along with the fact I like the 'cable' pairs due to their volatility. So here is how I work it.

Risk = 100
Reward = 220

Therefore R/R is 1:2.1 which for example may pan out like this:

220 x 3 = 660 pip win
100 x 3 = 300 pip loss

Therefore 50% win rate = 360 pips
Lose 3 more trades.

100 x 3 = 300 pip loss

Result of winning EVEN only 33.3% of the time.

360 - 300 = 60 pips

Question, even with reasonable trade judgement decision would it not be impossible, to be correct at the very least 33.3% most of the time once you average out your trades?