In this video, you will learn about risk to reward ratio. It is a ratio that tells you how much profit you make for every unit of currency you risk in a particular trade. For example, if your risk to reward ratio is 1:4, then for every $1 you risk, you make $3 as profit.
Assume you have invested $100 in your trading account. Now you trade one mini lot and buy the EUR/USD pair at the rate of 1.11. When the exchange rate reaches 1.14, then you have gained 300 pips and earned a profit of $300. So, for your initial investment of $100, you have gained $300 for a risk to reward ratio of 1:3.
So, you should aim for trades offering you a better risk to reward ratio. You should aim for a risk to reward ratio up to 1:5. Leverage helps you to control a larger position with a smaller capital. However, using excessive leverage leads to huge losses. So, learn to identify potential trade setups offering you a good risk to reward ratio before you enter into a trade.