In Forex trading, it is very necessary for the retail trader to understand what money management means and as well use it to grow your trading account. But then it is a sad thing that many new traders remain greatly unaware of some or event the most fundamental concepts of good Forex money management. Thus a lot of traders because of lack of adequate money management, fail to be profitable over the long-term in the markets.
I aam going to be talking on the risk reward ratio as a fundamental aspect of money management. Risk reward can be rightly seen as “powerhouse” of money management, thus how well you as the forex trader implements the risk reward will reflect how much money you have made on your open positions. If thus is accepted, it therefore becomes necessary that you can even enter the market without a trading plan and yet not lose money over the long run, or on the other hand turn a small profit into a greaser one, through the correct use of risk reward.
In the risk reward ratio in the forex, the bigger the profit (target) compared to the loss (stop loss), the smaller the risk/reward ratio becomes. What this means is that your risk is smaller than your reward. Let me put in an example here. My stop loss is 20 pips in a trade and then my target is 100 pips, my risk/reward ratio will now become 1:5 for this particular trade. Note one important rule on stop loss:The rule states that you should place your stop loss in such a position that it will get triggered only on the condition of the direction you chose being wholly incorrect. With this in mind, when I want to set my stop loss, I examine the trade and then ask myself where will the prices get to for my chosen direction to be the wrong one. The point I chose as an answer becomes the position of the stop loss.
The disturbing fact about this that a lot of traders follow the incorrect approach to risk reward by concentrating more on the potential reward and worrying less about the potential risk. But this is wrong. What you need to do first is calculate the risk which comes with any potential trade setup "AFTER" you calculate the best appropriate point to put your stop loss. After you have done this, you could proceed to calculating what the potential reward would be based on multiples of your amount of dollar you had risked.
Therefore, if I have risked $100 on a trade, I am supposed to normally aim for a reward of more than $200 or even $200 on the dot; here the R:R (risk reward ratio) will be 1:2. The logic behind this is that if I can realise at least 2 times my risk on all profitable trades, then over a series of trades, I will be able to offset my losses to the point of making a decent profit. To get a R:R of 1:2 or better would give you the opportunity to lose on a bigger number of your trades and yet still make money. It is therefore right to see risk reward management as the Holy Grail of money management in forex.
I aam going to be talking on the risk reward ratio as a fundamental aspect of money management. Risk reward can be rightly seen as “powerhouse” of money management, thus how well you as the forex trader implements the risk reward will reflect how much money you have made on your open positions. If thus is accepted, it therefore becomes necessary that you can even enter the market without a trading plan and yet not lose money over the long run, or on the other hand turn a small profit into a greaser one, through the correct use of risk reward.
In the risk reward ratio in the forex, the bigger the profit (target) compared to the loss (stop loss), the smaller the risk/reward ratio becomes. What this means is that your risk is smaller than your reward. Let me put in an example here. My stop loss is 20 pips in a trade and then my target is 100 pips, my risk/reward ratio will now become 1:5 for this particular trade. Note one important rule on stop loss:The rule states that you should place your stop loss in such a position that it will get triggered only on the condition of the direction you chose being wholly incorrect. With this in mind, when I want to set my stop loss, I examine the trade and then ask myself where will the prices get to for my chosen direction to be the wrong one. The point I chose as an answer becomes the position of the stop loss.
The disturbing fact about this that a lot of traders follow the incorrect approach to risk reward by concentrating more on the potential reward and worrying less about the potential risk. But this is wrong. What you need to do first is calculate the risk which comes with any potential trade setup "AFTER" you calculate the best appropriate point to put your stop loss. After you have done this, you could proceed to calculating what the potential reward would be based on multiples of your amount of dollar you had risked.
Therefore, if I have risked $100 on a trade, I am supposed to normally aim for a reward of more than $200 or even $200 on the dot; here the R:R (risk reward ratio) will be 1:2. The logic behind this is that if I can realise at least 2 times my risk on all profitable trades, then over a series of trades, I will be able to offset my losses to the point of making a decent profit. To get a R:R of 1:2 or better would give you the opportunity to lose on a bigger number of your trades and yet still make money. It is therefore right to see risk reward management as the Holy Grail of money management in forex.
