# “profitable Risk-reward Ratios: Strategies For Success In The Australian Forex Market”

“profitable Risk-reward Ratios: Strategies For Success In The Australian Forex Market” – If you ask me how many pips I made last month, I will tell you that I don’t know.

Check out my R-lot last month: a 6.1R gain. This R number often causes confused looks. What does R stand for?

## “profitable Risk-reward Ratios: Strategies For Success In The Australian Forex Market”

To understand this, we need to look back at our performance and its relationship to risk.

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Saying you made a profit of 50pp only tells me part of the story. The key information that is missing here is how much risk you are willing to take to earn this profit. After all, a profit of 50 pips is a good result if you have a stop loss of 25 pips, but if your stop loss is 200 pips, you are risking a lot for a relatively small reward.

In the first example, your profit is twice your risk. Your reward:risk ratio is 2:1. In the second example, however, your profit is only 1/4 of your risk. This results in a much less attractive reward:risk ratio of 0.25:1.

While there are many different ways to trade, we can agree that a 2:1 reward:risk ratio offers much better prospects if you have a strategy with the same win rate.

But how can we measure these risk-adjusted returns if not in pip? That’s where R and R-multiples come in.

### Best Risk Reward Ratio In Forex Trading

R stands for Initial Risk. The first risk is how much you are willing to lose on a trade. The initial risk can be expressed as a percentage of the account amount (for example, 1%) or as a percentage of the dollar amount you lose when the price reaches your stop loss (for example, \$50).

Let’s take an example here. You go long 0.1 lot on EURUSD with a stop loss of 100 pips. Unfortunately, the price moves against you, hits your stop loss and you lose \$100. That \$100 is your initial risk or 1R. Now you can say you lost 1R.

Now, all profits and losses can be expressed as multiples of the original risk. That multiple is called an R-multiple. You want your losses to be 1R or less and your profits to be as large as possible.

Let’s go back to our EURUSD example and let’s say you see that the price is going against you and you cut your loss halfway to your stop loss:

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Instead of your stop loss being the full \$100, you now only have \$50 to lose. We can express this as the initial risk (or R) multiplier.

The R-multiple on this trade is a loss of -0.5R. Let’s look at another scenario in this business where we can make huge profits:

We made a profit of \$128. Again, we can calculate our R-multiple as the initial risk (or R) multiple:

Since we can express the result of each trade as an R-multiple value, it is easy to calculate the R-multiple sum of many trades. Assume you had 5 transactions last week.

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Adding the above values, we can say that our total R-multiple for the week was +2.94R. This one number shows how our performance was for that week, not just the profit or loss, but how much risk we have for it. It is a more accurate way of evaluating performance than pips or ticks.

By using R and R-multiples we can measure our performance accurately. But how does this relate to the actual dollar value of our businesses? After all, consider the following two trades.

Assuming both are winners, we can say that both trades represent a 2R profit. However, one trade made \$100 while the other trade made \$400 in profit! How does this relate to R-multiples? The answer is position size.

Position size refers to the number of units we use when trading. In forex trading, this means our lot size. In futures trading, the number of contracts we place and in stocks, the number of shares we trade in one place.

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By adjusting our position size, we can change how much we are willing to risk (or profit) when trading. Usually a trader chooses a position size strategy and when an overview of position size falls outside the scope of this article, I will highlight one strategy.

In this strategy, we adjust the position size so that our initial risk (or 1R) always represents a certain percentage of the account size. Imagine your account size is \$10,000 and you risk 1% per trade, then the initial risk of each trade you make is \$10,000/100 = \$100.

A fixed fractional position size ensures that as your account size grows, the risk you take on each trade will grow accordingly. When you increase your account to \$15,000, then 1% of each trade is at risk of the first \$150.

Assuming a 1% risk for a business means that 1R will be equal to 1%. Imagine you earn 4.5R in one month. Using a fixed fractional placement rate, this increases the account balance to about 4.5%. If your risk in a trade is 2 percent, a gain of 4.5R will result in a 9 percent increase in account balance.

### How Take Profit And Stop Loss Orders Can Help Traders Manage Risk Better

Instead of just using pip, using the concepts of R and R-multiples provide a powerful way to consider your performance at risk. Measured against the amount of risk involved in achieving your performance, the result is a more accurate way to determine how well your business is doing.

Still have questions about how it works? Let me know in the comments or get in touch!