Risk/Reward ratio: When placing a stop loss

To place a protective stop-loss order, a trader can simply proceed from his/her available capital, or he/she can use the above calculation of the risk/reward ratio to determine the optimal distance in pips for the planned trade. Thus, if the value of the instrument is $100, you plan to make an $80 profit at a point value of $1, the risk/reward ratio will be 1:2, then a stop loss order should be set at a distance of 40 pips ($40). Below is a great example of setting such a protective stop-loss order:

Here we could plan the trade, betting that in case of a breakdown of the resistance the bulls on the USD/JPY pair will aim at the psychological level of 150.00. When this level is approached, the probability of bulls fixing profits increases, which usually happens at psychological levels, and downward correction develops.

Thus, the take profit is assumed to be at the level of, say, 149.90, when it approaches 150.00. The position entry is at 149.10, therefore the expected profit should be 80 pips and a stop loss order at risk/reward ratio of 1:2 should be set at a distance of 40 pips (80: 2), i.e. at 148.70. As we can see, in this case, the deal would have worked perfectly.

In this example the price went even higher, i.e. the potential profit could be even bigger, but as we said before, the bounce from this level was highly probable, so it would be better not to be greedy and take this factor into consideration when planning the deal.

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