How to Increase the Reward:Risk of Your Trades

Podcast:

#413: How to Increase the Reward:Risk of Your Trades

In this video:

00:29 – An easy technique which will increase your profits

00:53 – Most traders focus only on Win Rates

01:52 – How do you achieve high R:R trades?

02:24 – Using Limit Orders

03:49 – A real time example from the USD/JPY D1 chart

05:23 – A lower win rate but make massive gains

05:44 – My June FX Insiders Webinar – email me if you’d like to join me

I'm going to explain to you how you can increase the reward to risk of your trades by using limit orders. It's a very important part of your trading success. Let's get into that and more right now.

Hey, traders, Andrew here at the Forex Trading Coach with video and podcast number 413.

An easy technique which will increase your profits

Now I want to explain to you a very easy technique to increase the reward to risk of your trades, and by increasing the reward to risk of your trades, that is a massive step forward for you to become a profitable Forex trader. Now, when people start trading, they probably don't value how important that is.

Most traders focus only on Win Rates

Most people seem to think about win rates and I get emails all the time saying, "Hey Andrew, what's your win rate." Or, "If I took daily charts, what's your win rate or one hour charts does that increase my win rate?" And the problem with win rate, although it might feel very nice and warm and fuzzy to say, "I've got nine out of 10 trades correct." The problem is with most people that I've ever seen that have very high win rates is their reward to risk on the trades is very small and all they need is say, one out of 10 trades to go wrong, and it's wiped out all the gains that they've made from the other nine profitable trades.

So, having a win rate of let's say 90%, really doesn't mean a lot. And most people that I've seen over all the years of trading, actually lose money, bigger picture when they have high win rates. Although for most new people, it sounds like it's the most important thing. It really is not. High reward to risk is what counts.

How do you achieve high R:R trades?

But how do you do that, and how to do that in a practical, easy way? Well, some people might look at that and go, "Okay, to get a high reward out of my trade. I must have a very, very small stop loss. And every so often, you pull off a winning trade and it makes a high reward to risk." And you could do that if you really wanted to. The problem is your win rate on that will be very, very small because most of the time with a very small stop loss, your spreads or news announcements or something is going to take the trade out and you'll just end up losing so many trades.

Using Limit Orders

The easy way around it, and it's what we've done for years and years, is to use limit orders. So when you look at your charts, you can place a trade at the market, which means you're jumping in right now. You can use stop orders, which means on a buy stop, it means that you are putting a by trade in above the current price. Not really so good for high reward to risk. It's okay if you want to break out of a zone, let's say.

But the trade that we use are limit orders. So I'm using a buy limit means here's the price right now. I like my setup, but I'm buying when the price goes lower than where it currently is. And it doesn't mean to say, you need to sit there, just watching for the price to drop, drop, drop. "Oh yeah, I'm going to press buy now." You don't do that at all. You see your setup that you like as a trade and you then, using the way that we trade, using fib levels, et cetera, we then put in a buy limit to buy the trade if the price drops to a certain level.

And now of course we can just place that order and just leave the trade alone. We don't have to be there at that exact time when the price hits that level. The same thing in reverse with the sell.