Consider the old adage permeating the forex market that a trader must maintain a ratio of two dollars in potential profit for every dollar that is risked on a transaction.
Is it true? Does a 2:1 profit/loss ratio matter?
The first thing to recognize is that a successful trader is measured by profitability, not maintaining an industry-expected risk reward. Trading manuals and Forex gurus have long trumpeted the 2:1 risk reward ratio as a guidepost for traders. Traders in turn march dutifully to the mantra of 2:1 risk reward ratio.
Let's look at some examples in the forex market to test the traditional wisdom.
Trader A has a taste for risk in her trading style and accepts a healthy $400 average loss. But she is making an average of $800 on her winning trades - an "admired" 2:1 risk reward. But her winning percentage is only 30%. For every 10 trades she thus loses an average of $40, despite her 2:1 risk reward that is widely advocated.
Trader B, on the other hand, makes an average of only $175 on her winning currency trades but still endures a $400 average loss - a frowned-upon risk reward on 1:2.29. Yet she makes a gain on 70% of her trades. For every ten trades she makes she realizes a profit of $25.
What is at work here is not the risk reward ratio that is determining profitability but the risk reward ratio operating in tandem with winning percentage. It is the expected win percentage AND the fundamentals of the risk reward ratio that must be continually evaluated.
When playing the forex market traders must determine the style of trader they are, not blindly pursue industry-recommended ratios. Once a calculation is derived to tag your win percentage as a trader, then you can figure what risk reward ratio is needed at a minimum to make a trade pay off.
Traders with lower win rates must make sure their trades average larger risk rewards to deliver bottom line profitability. Others who are not willing to take large hits for a big score will push their trading activities towards a higher win rate and smaller risk reward ratios.
Too often trades are labeled a good play if they present rewards two and three times the money risked. But what if the trade has a success rate of only 10%? Who is going to make that "good" trade now? On the other hand if your research shows a statistical edge that provides a 90% win probability what will it matter if you are trading with a 2:1 risk reward or a 1:5 risk reward? Trading in the forex market can't be executed in knee-jerk fashion based on accepted ratios born in an informational vacuum.
There are many roads to success in the forex market but one road is pitted with more potholes than the rest - following traditional wisdom.
Is it true? Does a 2:1 profit/loss ratio matter?
The first thing to recognize is that a successful trader is measured by profitability, not maintaining an industry-expected risk reward. Trading manuals and Forex gurus have long trumpeted the 2:1 risk reward ratio as a guidepost for traders. Traders in turn march dutifully to the mantra of 2:1 risk reward ratio.
Let's look at some examples in the forex market to test the traditional wisdom.
Trader A has a taste for risk in her trading style and accepts a healthy $400 average loss. But she is making an average of $800 on her winning trades - an "admired" 2:1 risk reward. But her winning percentage is only 30%. For every 10 trades she thus loses an average of $40, despite her 2:1 risk reward that is widely advocated.
Trader B, on the other hand, makes an average of only $175 on her winning currency trades but still endures a $400 average loss - a frowned-upon risk reward on 1:2.29. Yet she makes a gain on 70% of her trades. For every ten trades she makes she realizes a profit of $25.
What is at work here is not the risk reward ratio that is determining profitability but the risk reward ratio operating in tandem with winning percentage. It is the expected win percentage AND the fundamentals of the risk reward ratio that must be continually evaluated.
When playing the forex market traders must determine the style of trader they are, not blindly pursue industry-recommended ratios. Once a calculation is derived to tag your win percentage as a trader, then you can figure what risk reward ratio is needed at a minimum to make a trade pay off.
Traders with lower win rates must make sure their trades average larger risk rewards to deliver bottom line profitability. Others who are not willing to take large hits for a big score will push their trading activities towards a higher win rate and smaller risk reward ratios.
Too often trades are labeled a good play if they present rewards two and three times the money risked. But what if the trade has a success rate of only 10%? Who is going to make that "good" trade now? On the other hand if your research shows a statistical edge that provides a 90% win probability what will it matter if you are trading with a 2:1 risk reward or a 1:5 risk reward? Trading in the forex market can't be executed in knee-jerk fashion based on accepted ratios born in an informational vacuum.
There are many roads to success in the forex market but one road is pitted with more potholes than the rest - following traditional wisdom.
Editors’ Picks
EUR/USD clings to gains above 1.1700
Following the correction seen in the second half of the previous week, EUR/USD gains traction to start the new week and trades in positive territory above 1.1700. The US Dollar (USD) struggles to attract buyers as investors await Tuesday's GDP data ahead of the Christmas holiday.
GBP/USD rises above 1.3400 on renewed USD weakness
GBP/USD turns north on Monday and trades in positive territory above 1.3400. The US Dollar (USD) stays on the back foot to begin the new week as investors adjust their positions before tomorrow's growth data, helping the pair stretch higher.
Japanese Yen remains on the front foot against a softer USD amid flight to safety
The Japanese Yen sticks to modest intraday gains through the Asian session on Monday amid a combination of supporting factors. This, along with a retreating US Dollar, keeps the USD/JPY pair depressed below mid-157.00s. Rising tensions between the US and Venezuela underpin the JPY's safe-haven status.
Editors’ Picks
Gold hits new record-high above $4,400 as geopolitical tensions escalate
Gold trades at a fresh all-time-high above $4,400 Monday, rising more than 1.5% on a daily basis. The potential for a re-escalation of the tensions in the Middle East on news of Israel planning to attack Iran allows Gold to capitalize on safe-haven flows.
EUR/USD clings to gains above 1.1700
Following the correction seen in the second half of the previous week, EUR/USD gains traction to start the new week and trades in positive territory above 1.1700. The US Dollar (USD) struggles to attract buyers as investors await Tuesday's GDP data ahead of the Christmas holiday.
GBP/USD rises above 1.3400 on renewed USD weakness
GBP/USD turns north on Monday and trades in positive territory above 1.3400. The US Dollar (USD) stays on the back foot to begin the new week as investors adjust their positions before tomorrow's growth data, helping the pair stretch higher.
Bitcoin, Ethereum and Ripple eye breakout for fresh recovery
Bitcoin, Ethereum, and Ripple are approaching key technical levels at the time of writing on Monday as the broader crypto market stabilizes. Market participants are closely watching whether BTC, ETH, and XRP can sustain breakouts and achieve decisive daily closes above nearby resistance levels, which could signal the start of a short-term recovery.
Ten questions that matter going into 2026
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