My risk-reward [Fudou Shutarou]

We call the ratio of losses to gains in trading the risk-reward. Shūtarō Fudō says that to win in FX, not only the win rate but the risk-reward is important. Here, learn the relationship between win rate and risk-reward and master the trading method of “small losses, big profits.”

*This article is a reprint and edit of an article from FX攻略.com September 2018 issue. Please note that market information written in the text may differ from the current market.

Shūtaro Fudō (Fudō Shūtarō) Profile

Currency exchange instructor, writer. Publishes seminar DVDs and interview CDs through a publisher. In addition to giving lectures at financial exchanges, securities exchanges, FX operators, and investment trust operators, he also writes for magazines and serves as an FX/stock school instructor.

Official site：Shūtaro Fudō's “Behind the News Reporting”
twitter：https://twitter.com/syutaro_fudo

What is Risk-Reward?

Risk means danger or hazard, a word commonly used in daily life, but it originally means predictable loss. Reward is translated as reward and is used in investing to mean profit in a similar way. Therefore, in FX, “risk-reward” is the ratio of loss to profit.

Not Focusing Only on the Win Rate

When I was a beginner, I would take profits at 10 pips and place the stop loss at 100 pips. In this case, the risk-reward is 100 to 10, i.e., 10 to 1. If you adopt such a high-risk risk-reward, the probability of a stop is lower, so the win rate goes up. For example, with a win rate of 90%, after 10 trades you would have 9 wins and 1 loss.

In this example, total profit is 90 pips (10 pips × 9 times), and loss is 100 pips (100 pips × 1 time), so in total you have a 10-pip loss. This kind of high-risk risk-reward, “big loss for small profit,” leads to large losses when a stop is hit. Because of this, even if you steadily accumulate small profits, one big loss from a stop can wipe them out. This pattern is called “choppy big loss” (kootsu-dokan), but with this, you cannot accumulate profits in the long term.

With the above risk-reward, you would need an even higher win rate to come out ahead overall. That said, it is difficult to maintain a win rate above 90% at all times, so you should reduce the risk of the risk-reward and increase the reward.