Importance of Risk / Reward ratio to make profits

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Importance of Risk / Reward ratio in Forex

What could be the most important thing to keep making money in long term without failing?
What ever be the winning / losing ratio of your strategy!
Whichever be the timeframe and pair!
Yeah its Risk / Reward ratio in your trading

What is Risk / Reward ratio? -- 
This ratio is mathematical formula dividing the amount trader afford to lose if the price moves in the unexpected direction (i.e. the risk) by the amount of profit the trader expects to have made when the position is closed (i.e. the reward).
Or in very simple stoploss / takeprofit ratio on each trade.

Why is it important? --
eg.

  1. If you risk 100 pips and look for 300 pips in profit, your risk:reward ratio is 1:3 or one pip of risk for every three pips in potential profit.
  2. If you risk 100 pips and look for 200 pips in profit, your risk:reward ratio is 1:2 or one pip of risk for every two pips in potential profit.
  3. If you risk 100 pips and look for 100 pips in profit, your risk:reward ratio is 1:1 or one pip of risk for every one pip in potential profit.
  4. If you risk 100 pips and look for 50 pips in profit, your risk:reward ratio is 2:1 or two pips of risk for every one pip in potential profit.
  5. If you risk 100 pips and look for 25 pips in profit, your risk:reward ratio is 4:1 or four pips of risk for every one pip in potential profit.

Considering all above cases with say winning percent only 70% i.e out of 10 trades 7 are won.
Case 1 :
Profits = 300 pips X 7 trades = 2100 pips
Loss = 100 X 3 trades = 300
Total profits = 2100-300 = 1800 pips
Case 2 :
Profits = 200 pips X 7 trades = 1400 pips
Loss = 100 X 3 trades = 300
Total profits = 1400-300 = 1100 pips
Case 3 :
Profits = 100 pips X 7 trades = 700 pips
Loss = 100 X 3 trades = 300
Total profits = 700-300 = 400 pips
Case 4 :
Profits = 50 pips X 7 trades = 350 pips
Loss = 100 X 3 trades = 300
Total profits = 350-300 = 50 pips
Case 5 :
Profits = 25 pips X 7 trades = 175 pips
Loss = 100 X 3 trades = 300
Total profits = 175-300 = -125 pips

Chart


In the above strategy you can see as risk / reward ratio increases the profits decreases eventually.
So in trading do maintain a good stoploss to takeprofit ratio.

Maintaining such ratio becomes difficult in manual trading due to emotions trader tries to close profitable trades as soon as possible where as waits long for for a losing position to recover!
Maintaining Good risk / reward ratio : I would recommend using Expert advisor in such case which sticks to strategy and exits though on profitable as well floating negative trades.
Which ever strategy with good risk/reward ratio you use in manual trading get it coded into Expert advisor i.e automatic trading robot in MT4 /MT5 and use it to trade.



Any comments / suggestions most welcome
Thank you.

 
exellent opinion!!!
 
Its impossible to know in advance how much pips you will make.
 
Yes that's true but whatever trades try getting maximum out of it dont closeup early with considerably low profits, most trades close with low profits while they wait in floating losses which can be hurting.
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