Podcast:

In this video:

00:31  Trading the daily charts again

02:23  10/15 four hourly trades hit full profit last week

03:26  Setting your profit target based on a technical level

06:00  The importance of being a longer term thinker in trading

The importance of risk to reward to ensure your success as a Forex Trader

In today’s video I want to talk all about the importance of risk to reward and to ensure that you understand how important that really is to ensure your long term profitability as a Forex trader. Let me share more with you right now.

Hi it’s Andrew Mitchem here the Forex Trading Coach. Today is Thursday the 5th of December and I’m here in beautiful Queenstown in the South Island as you can see from the glorious scenery behind me.

This week I’ve been trading back to just the daily charts again and the four hourly charts and it’s a great thing to be able to trade those longer timeframe charts but it’s also important to understand that with them you generally have yourself a high risk to reward than you do on a shorter timeframe charts generally because the stop losses are slightly bigger due to the technical level it needs to be. The profit target is also bigger. And I find that in general on the one day charts, the daily charts, my risk to reward is somewhere between around the 2.5 to 3.5 risk to reward.

I’ll give you an example. A couple of days ago I’ve had a couple of trades selling on the daily charts on the AUD /NZD. The market order made exactly a 3 to 1 risk to reward and the retracement order made a 2.6 to 1 risk to reward. So two excellent trades there. If you took 1% risk on each of those that was a 1.5% gain on the market order and a 1.3% gain on the retracement order. That’s if you took 1% on each of those two trades. Personally I trade half a percent risk and I trade a quarter of 1% on each of those two positions but still a great result.

Four hour chart trades also have very high risk to rewards due to also the large stop loss and the large profit target but don’t forget you can’t take those because don’t forget the way that I trade, and the way that I encourage people to trade is we don’t worry about how many pips we make. Each trade has an equal account percentage risk so don’t get worried and concern that you can’t trade these longer timeframe charts because you see the stop loss and pip has been too big, it really does not matter.

4 Hour chart results: 10 out of 15 profitable trades

When you’re wondering why you’re here sitting and watching charts all day when I can trade daily charts and occasionally four hourly charts. Last week for instance I took 15 trades on the four hourly charts during last week and I had 10 of them hit full profit and 5 of them were stopped out. The ones that hit full profit averaged around a 1.7 to 1 risk to reward over the 10 profitable trades. You can see how you can make some excellent trades but without being glued to the screen all day.

Yesterday I had a GBP/CAD buy trade and made a 1.6 to 1 risk to reward so with the half percent risk that it still a 0.8% on my account just on one trade just yesterday so you just see what can be achieved there by having the risk to reward in your favor. Generally the shorter the timeframe the smaller the risk to reward but personally I wouldn’t go in anything under 1 to 1 risk to reward. I like to have about a 1.5 risk to reward as a minimum but sometimes it’s slightly smaller but generally not too much.

Important to set your stop loss and profit target at a sound technical level

It’s important also to see your stop loss based on a technical level and set your profit target based on a technical level. You just don’t suddenly say well I’m putting a 50 pip stop loss therefore I have to pull a hundred pip profit target.