Simple Risk Reward Ratio Excersise

There is a very simple formula for absolute guaranteed long term profitability when trading Forex: Wins must be bigger than losses and the system used needs to win just half of the time – when this is consistently achieved your profit stream is guaranteed.

It’s a simple proposition but one than can be difficult to grasp, so in this week’s video I will illustrate this in a simple exercise that you can do at home at no cost– all you need is paper, a pen and a coin! Its an exercise my mentor taught me many years ago and it has stuck with me ever since.

Click here to get started:

Note there is no marketing within the video - hopefully you will find it of interest.

Unfortunately things are not that easy on Fx market for 1 reason. Your example isn't the reality.
Toss a coin which:
Tails =$1 (Loss)
Heads =$2 (Gain)

Obviously even the unluckiest man is the world will end up successfull.

You mentioned it... but you don't write it. we need a 'positive R/R' => R/R = 1/2 Let's say: SL 50 TP 100

Now you have 50% less chance that market will hit your TP whatever trade's direction as your TP is twice your SL bet's.

Now simply add spread or commissions from brokers.

This is why 90% retails traders are loosers.


Now if you want the reality. You have to add a table!

Toss your coin above the table.

The coin stays on the table with tails = $1 Loss
The coin stays on the table with heads = nothing

The coin falls from the table and hit the floor with tails = nothing
The coin falls from the table and hit the floor with heads = $2 Gain

Why the floor?

Simply because the coin has to make at least twice the distance

Perfect point CrazyTrader. No disrespect Ben Nathan, but your model is somewhat simplistic, and not very realistic.

Great additions guys and thanks - the idea behind the video was to show a simple illustration as to why Risk Reward Ratio is important.... having a 2:1 R:R was pretty obviously shown by the amounts used in the illustration....

and having a 2:1 R:R covers any broker spread and commissions...

The whole point of the video is that if you have a good R:R it means you only have to win half the time....

90% retails traders are losers because they cant overcome psychological hurdles (ie system chasing, lack of consistency etc) - people dont lose at trading because of commissions and spreads - but thats a lesson for another day.

Also the illustration was initially given to me by a trader who has since been verified and ranked as 2nd highest performing trader in the world by Barclay hedge for several years running, so I would hope it has some substance...

Happy Trading

Alternatively you can open a demo account and just trade with small SLs.

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