What is Risk to Reward Ratio?

What Does Risk to Reward Ratio Mean (R/R)?
A R/R ratio normally used by traders/investors to compare the expected returns of an investment to the amount of risk undertaken by them to get these returns.

This ratio is mathematically calculated by simply dividing the amount of profit the trader/investor expects to made when the position is closed (i.e. the reward) by the amount he stands to lose if price moves in the unexpected direction (i.e. the risk). The risk portion is normally pre-determine by using the stop-loss order while the profit is pre-determine by using the take-profit order.

Let's take a look at this example. A trader Buy 0.1 Lot of AUDJPY at 77.00. He place a stop-loss order at 76.50 and a take profit order at 78.00. By doing so, he has limited his loss to 50 pips while he expect to make a profit of 100 pips. Therefore the risk-reward ratio is caculated to be 1:2. The optimal risk to reward ratio differs widely among trading strategies. Some trial and error is usually required to determine which ratio is best for a given trading strategy.

In real time trading, it might be good to have stop-loss, take-profit and even R/R, but certain decision making should still falls on the trader himself. Should he still trade during news release? Should he still enter the trade if the price is near a very strong support/resistance line? Should he....

There are too many questions. There is also the fundamental and technical aspect of currency trading to consider too. I shall in my later posts go through some of the experience I experienced.