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. That’s not how you trade because 50 pips may or may not be corrected. It depends on the technical level needed for that stop loss and let’s say 50 pips was the correct level, you don’t just suddenly double it to make a hundred pips just because you want a 2 to 1 risk to reward. You need to put your profit target at a technical place for a technical reason and if that happens to be 1.85 risk to reward or 2.05 that’s the way it is you don’t just say well 50 pips stop means a hundred pip profit target. That’s not how you take good trades and to ensure good risk to reward. So I just wanted to make that point clear.

Elsewhere the other things I wanted to talk to you about, of course well trading daily charts and you can do that anywhere in the world. You know I’ve got clients in 46 countries so you know people have also different things going on their lives from their work to their family, in a sport, whatever it is and especially now coming up the holiday season, you know people can’t always be trading 1 and 5 minute charts and you know the great thing with the strategy that I trade is that you can trade those if you wish to and I’ve talked about them quite a bit over the last couple of weeks and I’ve talked about the success that I achieve on them and other clients have achieved on their short timeframes. But it doesn’t mean you need to be staring at charts all day and night if that’s not what suits you or for instance the situation doesn’t suit you. So you can take any timeframe that is available to you. And that is the beauty of forgetting about trading pips because you can take those longer timeframe chart trades and that is the beauty of having high risk to reward trades.

You see I quite often get people come to me and say “Hey Andrew you know what’s the winning rate of your strategy?” and yes it’s important but it’s not like critical and you know a lot of people expects systems to have a 90% win rate and I say “Well fine, go and trade that type of system if you wish to but I can almost guarantee that a system that has like a 90-95% success rate in terms of winning trades either has a very, very low risk to reward probably under 1 to 1 or it doesn’t have a  stop loss in place at all. Now you can trade without a stop loss if you wish but I know there are people out there that you should never trade with stop loss, that’s fine if you want to trade like that.

Thinking longer term as a trader – the bigger picture

To me it’s really important to be a longer term thinker about my trading and it’s important to have that controlled risk and to know that my risk is controlled at a certain level that I’m comfortable with whatever that is, whether that would be half a percent, or a one percent, whatever that is that suits you but I know that when I take every trade that’s the maximum I can loose on any one position and that’s a really important thing you know emotionally to be able to keep trading. Plus also sensibly I don’t want to be risking obscene amounts on each trade and all of the sudden a trade goes wrong so just a few really important points there for you to consider. It will definitely aid your trading.

So that’s all for this week. I look forward to talking to this time next week when I got some more tips and Forex information to share with you.

So this is Andrew Mitchem from the Forex Trading Coach. If there’s anything I can do to help you progress with your trading, please don’t hesitate to contact me, email me [email protected] and don’t forget there are two webinars or two different types of webinars that I hold each week for my clients, those who are brand new to trading and those who are slightly more experienced but probably frustrated with their trading. If you haven’t attended one of those webinars yet make sure you sign up to one of them on my website and I look forward to helping you become a really profitable Forex trader.

So bye for now.