HomePage > Blog > Risk-Reward Balance" - Risk Management Strategies Used by Pro Traders "Achieving Risk-Reward Balance" - Risk Management Strategies Used by Pro Traders Table of Contents 1. What is Risk-Reward (Risk-to-Reward Ratio)? 2. Specific Examples of Risk-Reward 3. Importance of Risk-Reward 4. 8 Practical Risk Management Techniques 5. Summary To achieve consistent results in trading, you need not only a strategy but also accurate risk management. Among these, the "Risk-to-Reward Ratio" is a crucial indicator that guides robust trade design, not solely relying on the winning rate. This blog explains the basic concept of risk-reward and systematic practical risk management techniques. 1. What is Risk-Reward (Risk-to-Reward Ratio)? Risk-reward is a concept that represents the ratio of risk to reward in a given trade, indicating "how much risk (loss) is taken, and how much return (profit) is expected." For example, if you aim for a 30,000 yen profit with a 10,000 yen risk, the risk-reward ratio will be 1:3. By being mindful of this ratio, it becomes possible to design trades that yield profit even without relying solely on the winning rate. 2. Specific Examples of Risk-Reward Below are trading scenarios with actual risk-reward ratios set. 1:1 (Risk = Return)Requires a winning rate of 50% or higher. A ratio often seen in short-term trading such as scalping. 1:2 (Return 2 for Risk 1)Breaks even with a winning rate of approximately 34%. A setting that makes it easier to profit even with a low winning rate. 1:3 (Return 3 for Risk 1)Total profit remains with a winning rate exceeding just 25%. Effective for medium to long term. By being mindful of the risk-reward ratio in this way, it becomes possible to design consistent strategies. 3. Importance of Risk-Reward Importance of Risk-Reward Setting risk-reward plays a central role in trading strategies for the following reasons. Clarification of Profit and Loss Balance: Because "acceptable loss" and "expected profit" can be quantified before trading, emotional judgments can be suppressed. Improved Strategy Reproducibility: Even if the winning rate slightly decreases, it is possible to increase assets in the long term if the risk-reward is properly set. Optimization of Money Management: Because lot size and acceptable risk can be clearly set, continuous trading becomes possible while suppressing capital depletion. 4. 8 Practical Risk Management Techniques To make the most of risk-reward, it is important to combine it with the following specific risk management techniques. Setting Stop-Loss: By setting a loss limit in advance, you enhance your defense against sudden price movements. Optimization of Position Size: By keeping the risk amount per trade within 1-2% of total capital, you minimize capital outflow during losing streaks. Implementing Diversified Trading: By diversifying currency pairs and timeframes, you reduce the risk of being overly dependent on specific market conditions. Expectation Value-Based Trade Planning: Multiply the winning rate and risk-reward, and continue only trades with a "positive expectation value." Understanding the Market Environment: Check for volatility and the presence of economic indicator announcements, and make judgments appropriate for that day's strategy. Regular Strategy Review: Record and verify performance on a monthly/weekly basis, and re-evaluate risk-reward and logic. Emotion Management: To prevent revenge trading after a loss, set a "rule to rest" in advance. Utilizing Hedging Strategies: Combining highly correlated currency pairs or using means like options to cover the upper limit of losses are also effective methods. 5. Summary Risk-reward is an important indicator, along with the winning rate, that influences the expected value of a trade. Having the perspective of "how much risk to take and how much reward to aim for," rather than simply "win or loss," is directly linked to long-term stable profits. In challenge-based prop firms as well, the design of risk-reward and the consistency of risk management are positioned at the core of trader evaluation. Let's start by reviewing your trading records and quantifying your own risk-reward tendencies. That will be the first step towards growing as a professional trader.
