In this article I am going to talk about an important part of your trading plan and your trading journal, generally. This part is about to know very well the risk/reward ratio of your investments. First of all what is the risk/reward ratio. The risk is the money you will lose if your investment will fail. The reward is the money you will earn if your investment will win.For example a 1:2 risk/reward ratio means that if you win you will earn the double amount of money from when you will lose.
In Binary Options Industry the risk/reward ratio is fixed.This means that you know how much money you will lose or how much money you will earn before take your trade. So, it’s easily to understand that the payout percentage of your broker it’s very important for this ratio.You choose the risk of your trade because you chose how much money you want to invest in every trade.This amount of money is your max loss but your reward has to do with your broker. For example, if you want to invest 100$ per trade in EURUSD currency pair and the broker’s payout is 75% your risk reward ratio is 1/0.75.
In other products with leverage like Spot Forex, CFDs, Spread Bets the risk/reward ratio is different. It depends on your stop loss and your stop limit order and you can fix this ratio as you want. For example, if you want to take a contract in EURUSD currency pair in a spot FX or a Spread Betting Broker and you will choose 20$ per pip(point) and you will put your stop loss order at 3 pips(30 pipettes) and your stop limit at 9 pips(90 pipettes) your risk/reward ratio will be 1:2 and this means that if your trade win you will earn the double amount of money from when will you lose.Let’s see 2 scenarios.
1st Scenario: You have put the above orders(stop and limit) in your contact in EURUSD currency pair but during the trade you have the chance to change them manually by closing your trade early but let’s assume that you will keep these orders. In the first scenario the market is moving against you by 3 pips.This means that your contract will close and you will lose 3X20$=60$ + 20$ (the spread)=80$ which is your max loss.
2nd scenario: The market is moving by your side and finally reach the 9 pips and your contact will close. This means 9X20=180$ – 20$(the spread)=160$ which is your max profit and the double amount of money from your max loss. So, the risk/reward ratio is 1:2.