Are you having a hard time winning consistently in your trading? There are tonnes of variables that can knock you off course and at times it can seem absolutely impossible to succeed, but that’s not the case! Everyone can win with the right approach.
I’m an advocate of Risk vs Reward trading (RR) and whole-heartedly believe that with enough discipline to stick to preset processes anyone can win using a RR-based approach to the market. So what is Risk v Reward and how can you work it into your personal trading plan?
Aim To Make More Than You Lose
As a Risk vs Reward trader my main goal is to make more profit on my winners than I let go of on my losers. I know & accept that losses are a normal part of trading so rather than trying to fight and avoid them I work them into my overall process. Here’s how it works:
When trading with a Risk v Reward approach we track profits & losses in what we call ‘R multiples’. A single R multiple is however much we risk on a trade. I risk 2% per trade so for me, 1R = 2%. That R multiple will remain the same on every trade. For me, 1R will always be 2%.
To win we must make more R multiples than we lose. So if our risk on a losing trade is 1R we want to make upwards of 2R per winning trade.
This approach allows for regular losses as when we do win the profits are considerably larger than our losses.
The example to the left shows a strong RR trade setup where we risk 1R (2%) to make 2.5R (5%). This means we could lose 2 trades and win one and still be up a total of 0.5R (1%) profit, despite a win rate of only 33%.
Hopefully you are starting to understand the concept of RR trading and can see how it’s effective at forming long term success.
Benefits of a Risk vs Reward Approach
RR trading is most beneficial in the fact it cuts out all the stress of losing trades, taking significant strain off your mindset and boosting your confidence – this makes for a happier and more enjoyable trading career if nothing else. What’s the point in pursuing trading if everyday is a stressful nightmare? It has to be enjoyable as well as profitable.
With RR trading you know you only need a small win rate to be successful so even if you run into 3 losses in a row you know that when the right trade comes around all these losses can be made back easily. It takes away the need to stress over every position by turning success into a longer-term process where profitability is the result of a succession of weighted wins and small losses. With RR you can say goodbye to giving back all your profits on losing trades, you will now at worst only give back a small portion.
No More Pips
The days of pip counting are all but dead with a RR approach because risk remains the same no matter how many pips we put on our SL. To clarify what I am saying: Imagine a 1:2RR trade with a 50 pip SL. We risk 2% over 50 pips and we lose. That’s a -1R loss. On the next position we trade only a 15 pip SL and we win 30 pips profit as a 2R win. We now have a net profit of +1R/2% but a negative count of -20 pips. So we lost pips and still made money. Interesting right?
The days of pip counting are all but dead with a RR approach because risk remains the same no matter how many pips we put on our SL. To clarify what I am saying: Imagine a 1:2RR trade with a 50 pip SL. We risk 2% over 50 pips and we lose.
That’s a -1R loss. On the next position we trade only a 15 pip SL and we win 30 pips profit as a 2R win. We now have a net profit of +1R/2% but a negative count of -20 pips. So we lost pips and still made money. Interesting right?
Focus On The Process & Taking The Best Trades
Adopting a Risk vs Reward approach to your trading allows you to put all your focus on catching the best trades rather than grabbing for money at every opportunity. When you focus on trade quality your skills will truly increase; no more cutting profits early, no more inflated losses. Everything now comes down to taking the best trades possible and securing the highest R you can on winning trades while never letting losing trades exceed that all important 1R multiple. Money then comes naturally as a result of this process.
Try adopting a Risk vs Reward approach to your trading and see how it improves your performance. You will need discipline and patience to play it out but trust me the results will speak for themselves.
Stay Up To Date
I’ve made a video over on YouTube that accompanies this article. If you want to see the processes discussed and presented in video form then head over there & subscribe!
Join my trading team to access a bank of educational videos, weekly forex market breakdowns and trade alongside me with access to all my trades in my private team server.