Forex trading: The Awesome Power of Risk to Reward Ratio

In all of the books, articles, blogs, and videos on forex trading, you will find a lot of discussion on risk-to-reward ratio. It’s not without good reason. Good risk to reward (or RR) can compound your account nicely. Poor RR can burn it in no time.

Here’s a fantastic example of the power of risk to reward ratio, and what it can do for a trader’s account. Justin Cunningham is a $100,000 FTMO trader from New York. He passed his FTMO Challenge in April, and got his FTMO account at the beginning of June. Since then, he’s already withdrawn nearly $13,000, which we’ve verified with FTMO proofscan.

Here’s a screenshot from a series of his losses. We see four trades that hit their stop loss and lost just over $1,000. There’s also a couple of other trades which presumably were running in profit. Justin probably changed the stop loss to the entry point, but they fell back on themselves, unfortunately.

Justin Cunningham's good risk to reward ratio: his initial losses

In total, these trades amount to a loss of over $4,000. However, Justin reveals that he is operating on a 1:5 risk-to-reward ratio. What this means, of course, is that Justin can gain $5 for every $1 he risks.

But what’s really awesome is the fact that he can be in profit with just one win, even after four losing trades in a row.

And that’s exactly what happens – take a look at his next trade:

The result

The potential of a 1:5 risk to reward ratio in forex trading
His short position against the Nasdaq is successful, bringing in just over $5,000 of profit. Not only does it recover all of his previous loss for the week, but it also brings him up to just shy of a $1,000 overall gain .

What’s also worth mentioning about this risk-to-reward ratio is the fact even Justin’s fifth trade could have been wrong, but so long as the sixth one was successful, it would’ve recovered all his previous losses and he would’ve broken even.

That’s the power of good RR, and it’s awesome to see it in action, and not just as a theory on trading websites. Here’s Justin’s tweet in full:

Congratulations, Justin. Long may your success continue.