Risk and reward
What you learn in 3 minutesThis lesson shows how the size of your target compared with your stop sets the share of trades you must win just to break even. On EUR/USD near 1.0850, one pip on one standard lot is 10 units of the quote currency, which converts to KSh at the rate your broker shows. Work through the arithmetic once and the numbers stop being abstract.
A 1 to 2 ratio over 10 trades
| Step | Amount | Note |
|---|---|---|
| Stop distance | 20 pips | chosen before the trade is opened |
| Target distance | 40 pips | twice the stop, so the ratio is 1 to 2 |
| Loss on a losing trade | KSh 2,000 | 20 pips x 10 units per pip x the KES rate of 10 |
| Gain on a winning trade | KSh 4,000 | 40 pips x 10 units per pip x the KES rate of 10 |
| Wins out of 10 | 4 | a 40 per cent hit rate |
| Losses out of 10 | 6 | the remaining trades |
| Total from wins | KSh 16,000 | 4 x KSh 4,000 |
| Total from losses | KSh 12,000 | 6 x KSh 2,000 |
| Net result | KSh 4,000 | KSh 16,000 minus KSh 12,000 |
The KES rate used to convert the quote currency varies between brokers and changes through the day, and many brokers charge a spread or commission on top. The pip value shown here is for one standard lot before any of that.
The mistake people make here
The common mistake is to fix the target at whatever looks reachable and let the stop sit wherever the account can bear it, which quietly turns a good ratio into a bad one. People also copy a ratio from a video without checking whether the market in front of them offers that distance. Instead, decide the stop first from the chart, then ask whether a target twice that size is realistic before entering. If it is not, the trade is not worth taking.Check yourself
With a stop of 25 pips and a target of 50 pips, and a loss of KSh 2,500 on a losing trade, what is the net result over 10 trades if 4 win?
Each win is 50 pips, so KSh 5,000. Four wins give KSh 20,000. Six losses give 6 x KSh 2,500 = KSh 15,000. The net result is KSh 5,000.
If the stop is 20 pips and the target is 20 pips, how many of 10 trades must win to break even?
Five. With equal sizes, each win cancels one loss, so five wins and five losses leave nothing.