Understanding Risk-Reward in Trading

It's easy to get fixated on finding the perfect entry, but a good understanding of risk-reward is arguably more critical for long-term consistency. Simply put, it's the ratio of how much you stand to lose if the trade goes against you (your risk) versus how much you expect to gain if it goes your way (your reward).

Before entering any trade, you should define your stop-loss and your profit target. If you're looking at a $NZDJPY long at current levels, say 94.888, with a stop at 94.600 and a target at 95.500, your risk is about 28 pips and your reward is about 61 pips. That's roughly a 1:2.1 R:R, which is a good starting point. Aim for at least 1:2 or better. Even if you're only right 50% of the time, a consistent positive risk-reward means you'll still be profitable.