Speaker 1: What is the best reward to risk ratio when it comes to trading forex? In today's video, I'm going to give you the best answer I've got to answer this question, trying to figure out if we should have a bigger target, a smaller target, a small stop loss, or a big stop loss. I'm going to give you guys my best answer today. So stay tuned. Let's get into it right now. What's up, you guys? Welcome back to my channel. My name is Nick, and I talk all about trading and investing. And most of you guys know me as a currency trader, and I'm going to be talking about risk to reward when it comes to currency trading specifically. What's the best reward to risk? Should you have a giant take profit? Should you have a very small take profit? Or should you take a small stop or a big stop? All of these are questions that a lot of traders struggle with, and I get this question pretty frequently. Nick, what risk to reward is the best one? Now, I'm going to give you a little bit of warning here. The best risk to reward ratio is not something that is just easily said as, oh, it is just a one-to-one or a two-to-one or a three-to-one. I'm going to give you guys some of the pros and cons of each so that you can make that decision for yourself. Because let me tell you that the biggest barrier to success for almost every trader that I've ever talked to is in fact trading psychology. And it is very, very important that the risk to reward ratio that you personally use matches your style. And so that's what I'm going to try and provide to you guys. And I'm also going to share what I personally benefit the most from when it comes to risk to reward ratios. Okay. When we're looking at this, it's very easy in theory to say, oh, you want to have a huge target on your trade and a very small target. Because let's say that you're selling into this resistance area and you say, okay, I think price is going to keep going lower. We're going with a trend. It's all good. And we're going to all make a bunch of money and have a nice weekend in the Bahamas. But the problem becomes when we look at this, yes, this is fantastic when it works out. This sort of scenario would have given us just a casual seven to one, which is of course amazing if you capture that, but it's much, much easier said than done. Occasionally, I'll get some trolls on the Instagram and the YouTube comments and stuff that will tell you, oh no, it's so easy, Nick. All you got to do is be perfect with your entry. And I'm like, well, you know what? I don't know about you, but getting the perfect entry has never been easy for me. And I've been doing this for five years and dedicated my entire career to this. So I can tell you it's not easy to get the perfect entry. And that is why having a stop that is incredibly tight, although it may work for some is very difficult for, I think the average trader. So let's get past that first concept. I think that going for a massive risk reward may be suitable for some, but I think for the vast majority of people, something like this is just not going to be very consistent. Why? Because your entries, unless you are just some sort of market God, they're not going to be this accurate all the time. In fact, you might see many situations where you get something like this, or this, or this. Anybody ever seen stuff like this happen to them and they're trading and been like, well, now I'm going to go kick a cat because I'm so pissed off. Don't do that. I own a cat and I love Blaze. He's a great guy. Here's a picture of him. Anyways, the point here is when we're talking about small stop losses on our trades, it gets really quick. It really gets fuzzy pretty quick because when you put your stop too tight, you are almost asking the market to whip you out of trades very quickly. Now, again, there's nothing wrong with keeping a relatively tight stop, but I think when you get too tight, you're going to ask for a lot more losses relative to wins. Unless of course you're those Instagram trolls who in hindsight, they're always right. Dangerous, dangerous territory. Let's not get into that. So anyways, what is the better risk reward then? If we're not going to put a super tight stop with a massive take profit, what are the other scenarios? Well, let me give you a shortcut answer. And I think that possibly the best risk reward for the average trader, like somebody who is newer trying to figure this out, I would encourage people to try out in their demo account and their backtesting something like a two to one. Now, why a two to one? A two to one gives you a couple great benefits. Let me point them out. Number one, your stop loss isn't too tight. Very, very important. What we just mentioned, very, very common for traders to get stopped out preemptively before the market goes their direction. Has that ever happened to you? Because it's really frustrating and I think everybody experiences it. And I still do to this day. Occasionally it's no fun, but it's just part of it. Now, when we increase the stop loss a bit relative to our take profit, what we do is we give ourselves a little bit more room for error. Maybe the price does go against us for a minute, but then ultimately starts to roll over. This actually happened to me on Euro USD this week and it was kind of awesome because my stop loss was far enough away that it kept me in the trade before price dropped back in my favor. So that was kind of nice. Now, the number two, it allows us to benefit from a positive reward to risk. And this is what I mean by this. When you have a positive reward to risk, that means that your reward is bigger than your loss. What that also means is that when your losses are smaller than your wins, you don't have to win as often. This means that your win percentage can be less. In fact, I believe it's, is it 33% roughly to break even? Meaning that you can be wrong quite frequently, right? If you lost 50%, let's say you took, let's, let's look at this really quick. Let's say you took 10 trades, five trades are winners, five are losses, but for each win, you make two, which is 10 total, right? Five times two. And for each loss, you lose one. You're still left with five R five times your initial risk. I know it's a little bit confusing, but basically this is your one risk, right? Each time you win, you make two, two times that R, which is two R. So you're risking one R to make two R each time. Well, that comes out to a nice profit. And all you had to do was make 50% of the time. Correct. See where I'm going with this. You capture both scenarios. So your stop loss is not too tight, but your risk reward is still positive. Okay. So I think that a two to one is probably a good place to consider. If you are a trader testing things out in demo, and I do encourage you don't go trading just because Nick said, Oh, two R, you know, two to one, uh, rewards risk seems decent. You should go test these concepts for yourself and see if you're comfortable with them because chances are, you're probably not going to get 50% of the time with a two to one. It's actually more difficult than it sounds. So I made that sound very easily just for, for demonstration, but it's hard to be 50% correct with a much larger take profit than stop loss. But the cool thing is you don't need to even be 50% right. You can be 40% right and still make money. Let's look at that. So let's take, we took, let's say we took 10 trades here. And again, 40% of the time we were correct. We get four wins, six losses. Maybe this is a little bit more realistic. And let's say your entries are, are decent. They're okay. You came out with four wins times two gives you plus eight R and then six times one gives you six losses at six, uh, at one R each. This case gives you plus two R you still came out profitable. That's not so bad, right? So this is what I mean by benefiting from a positive reward to risk. So now is two R the best one? Is it objectively the one that we should all use? Maybe, maybe not. So for me, let me talk about which one I actually use in my own trading. So for me, I'm going to really throw a wrench in it and say that I don't actually set targets in my trades and I mostly trail my stops. Now, occasionally I'll put a target on my trade, but I really like to trail stops because it does something that most people simply are not going to want to do. Um, remember when we said putting giant take profits on a trade, uh, might not be comfortable for most traders. Well, it kind of is the same reason why I don't put stops on my trade or sorry, targets on my trade. If I took a trade here and price rolls over every once in a while, I might catch a monster trend and I can trail this stop to something crazy, like five, six, seven times my initial risk, right? If I capture a seven R that trade could be phenomenal. That's going to come very infrequently. And that's why I think it's not really meant for most traders is because most people want to win more often than once every blue moon, right? Uh, what ends up happening with my trailing stop is my win rate starts becoming much lower and my, my wins become very large relative to very small losses. Does that make sense? Um, the concept here with this, uh, this whole trailing stop for me is that I will trail stops based on structure. But the idea is that I like to trail stops because it gives me the chance to capture the most of a move. But let's say for example, that, um, another way of doing that would be, you know, maybe, maybe you just go for large take profits relative to stops. This is the, the alternative to that. Let's say that instead of doing what I do, which is not objectively the right way, it's just what I like to do. Let's say that you like the concept of going for something more like a five to one. Now, in this case, this is cool because you could theoretically, again, the problem with this is you're going to take way more losses than wins. Unfortunately, that is just the case. You're going to have people who will disagree with me on that. They'll say, Oh no, bro. You know, you just got to be really good. And then you can capture moves like this all the time. I'm like I said, congrats to you if you're really doing it, but I would love to see some sort of third party track record to prove that you're doing it because it's very easy to say very difficult to actually do right. These sort of moves, you're still going to catch stops more often than hitting your targets. It's almost inevitable unless you are just an absolute market killing machine. And a forewarning, most people are not, uh, that is, that is more of a myth than, than meets the eye, especially to new traders who are getting into this stuff. And they see people bragging about how good they are in the markets. Uh, most likely they're not unless they can prove it to you with a site called my FX book.com or FX blue, or one of these third party track records that will show a performance from not just somebody claiming things, but actually proof. So anyways, um, when we're looking at Euro New Zealand here on the four hour chart, let's say that I think price is going to come all the way down to this previous swing low, probably could happen if the trend does really get going here again to the downside. So let's say that with that, I'm very patient with my trade and I say, okay, I understand that I might get stopped out, but I'm going to capture a lot when I am correct. So when I am right, I'm going to take five times my initial risk, right? So we risk one to make potentially five. If we risk a hundred dollars here, that would mean that this profit, if it hits would be $500, five times that amount, which means in this case, our win rate can actually be very low and we can still make money. Because in this case, what if we just won, I don't know, 30% of our trades, let's say 30%. Again, we take 10 trades and in 10 trades, we have three wins and seven losses. In this case, you're going to be incredibly profitable, which sounds weird, right? You're only winning 30% of your trades. So how does it work out? Well, we take three times five, we get 15 R minus seven R not so bad. We get eight R profit. Now, again, this is difficult. It's going to be hard to even maintain a 30% because a lot of times you're just going to get trailed out or stopped out, sorry, of these trades. But again, these are different risks rewards for people with different approaches in the market, different tolerances. Some people can't handle losing all the time and that's okay, right? There's nothing wrong with saying, hey, I want to make sure I'm actually winning 50% of my trades, or I got to at least get 60% or 30% or 40% of your trades, right? But generally, win rate is less important than how much profit you're taking in relative to your losses. But again, from that psychological standpoint, it might be more important for you to look for opportunities that you can win a little bit more frequently because it, let's be honest, if you're taking, if you're stepping up and losing most of the time, it can be challenging to take your next trade. And this is where trading psychology is difficult. And again, it comes down to you as a trader, what works for you? Some traders, they end up saying, okay, I'm comfortable with a three to one, which means I lose a lot of my trades, but then my wins are nice and big. Okay. These are the concepts that you as a trader have to answer for yourself. Nobody else can answer them exactly for you. Like I said, I think starting with a two to one and trying it out in your backtesting and in your demo account, maybe a great way to see, hey, what does this feel like to me as a trader? Well then let's try a three to one. Am I comfortable with taking more losses, but bigger wins? What about a five to one? Is that totally ridiculous? Or maybe I'm that sort of trader who can sustain themselves by, you know, I'm going to lose most of my trades, but when I do take a profit, it's going to pay for all of these losses, right? When you take a big, big win relative to small losses, one trade can really set you back into profit and wipe away a lot of losses very quickly. I hope this has been helpful to you guys and giving you a little bit of the pros and cons of each has definitely been a good exercise for me. Just sharing my content and on YouTube has been a super helpful way as a trader, just to get my thoughts and ideas out there. If you did enjoy this video, make sure to like down below and make sure to also subscribe to the channel if you want more free content like this in the future. Thank you so much, guys. And we'll see you back in the next video. Guys, thanks so much for watching this video. If you enjoyed it, please remember to like the video down below, because if you don't, you're statistically 84.72% more likely to blow an account in the next 48 hours. Don't ask me how, don't ask me why, that's just facts. 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