CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Risk/Reward Ratios and Hit Rate

Not every trade will go exactly to plan. But calculating a risk-reward ratio for any new position will help you prepare for surprises – and respond strategically. We’ll explain the simple rules behind RRR to help you manage risks and better sustain long-term profitability.

Measuring your trading success

When you first begin Forex trading its vital that you expand your knowledge of trading fundamentals.

These include macroeconomic analysis, technical analysis, charting, and an understanding of the psychological impacts of trading. It’s also critical that you develop an approach to managing risk.

Understanding risk comes from an appreciation of the different metrics that measure the success of a given trading strategy or system.

Analysing different measures of trading success makes it possible to improve the results of any trading system or strategy, heightening profit potential and the returns from assets under management.

In this section, we’ll look at two of the key metrics that you can easily measure and analyse in to improve your understanding of trading performance and the effectiveness of your overall strategy.

These are:

  1. The Risk/ Reward Rate
  2. The Hit Rate

We’ll also look at how both can be combined and analysed.

Risk/Reward Ratio defined

The Risk/Reward Ratio is a measure of the potential reward or profit that a trader or investor can expect from any given investment in terms of the potential risk of loss.

For example: if a trader was willing to risk losing £2 on trade and the potential profit target was £10, then the Risk/ Reward Ratio would be 2:10 (or simplified to 1:5).

It should be noted that any calculation is based on some hypothetical inputs. You can have a good idea of your potential risk by establishing a stop-loss (see our article on stop-losses here). The potential reward or profit is only a projected expectation before the trade or investment has even been entered into.

Risk/Reward in practice