Stop Losses and Take Profits: Risk Reward Ratios

Like stop losses you also need to have limit order (a set price) in the market that when hits permits you to get out of the market for a profit. Take profit orders can be optional but I don't believe stop losses should be options as part of a trading strategy. First of all our take profit should far outweigh the possible loss. So if you have a stop loss at 20pips our potential target level has to be much greater to give us a risk reward ratio of at least 1:2 although I personally trade a higher risk:reward. Reason being of course that we want our potential profits to be greater than the amount at risk on any one trade. If we were to have a risk reward ratio 1:5, we would only need to be right 20% of the time and we would make a profit if we are right 40% of the time. Always look at historic price data to set stops; limit orders should in general be greater than our stop loss.

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