Risk to Reward ratio is another important topic for Forex Trading. It is very important to evaluate your risk before taking a trade. If your reward is less than what you are risking, then it does not make sense to take the trade.
For example:
U.S. Non Farm Payroll Projected Movement = 90 pips.
If Pre-Release Price for EUR/USD is at 1.5900, once the news comes out, we see a quick drop to 1.5840.
Original Scenario
| Entry: | SELL EUR/USD @ 1.5840 |
| Profit Target: | 1.5810 |
| Stop/Loss: | 1.5900 |
| Results: | 60 pips of risk and 30 pips of profit = 2:1 risk to reward ratio. |
Now you have a choice, if you get in at this point, you might have to suffer retracement all the way back to 1.5900, which is 60 pips, and your profit target is only 30 pips, or 1.5810 (projected 90 pips movement). Your risk to reward ratio is actually 2:1, risking 60 pips to make 30 pips.
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