Traders in Forex are always at constant risks to lose their capital. This market is volatile and they can lose their money anytime. There is no room for mistakes and you can hardly recover your money if you lost it in the market. In this context, traders are always trying to take the market with minimum risks for maximum profit. In this way, if they lose in the market which is inevitable, they will still have some profit in Forex. This idea of trading the market gives birth to risks to reward ratios in Forex. Our discussion is all about this risk to reward ratios.
Being a full-time trader you will always have some losing trades but this doesn’t mean that you will remain on the losing sides at the end of the day. There are some experts in the United Kingdom making millions of dollar only with 60% winning rate. So how do they do so? They follow very simple tricks. When they execute any orders they always make sure that they are going to make at least times more than their losing amount. If you simply follow 1:3 risk-reward ratio in each trade execution, then out of 10 trades if you lose 7 trades then you will be still making money. The profit from your three winning trade will exceed your net loss, which means you make money from these 10 trade execution.
Risk to reward ratios
Forex is an investment market and it is very common in investment market to use this risk to reward ratios. It is the calculation done by the investor to know how much of return on investment they can expect based on their undertaken risks in Forex. It is a calculation which helps you to estimate how much you are going to lose and how much you are going to make based on your strategy and your undertaken risks in the investment market.
You need to more concern about your investment rather than your return. If you always think about making a profit, then you can never really learn anything in the Forex trading industry. Always learn from the professional trader and see how do they make money. Every single one of them trades the market-based on their own market analysis. They always make sure that they are trading in the higher time frame along with the trend. Some novice traders often trade against the market trend but this thing is the major cause of negative risk reward ratio.
How does it really work?
Risks to reward ratios are very important for Forex traders in their career. If you do not know how much money to risks for making $10 profit, you are going to find it very hard to make money in Forex consistently. You may make a profit but in the long run, this profit will not be in your account. Risks to reward ratios keep your money safe in the market even if you lose your trades.
Let’s think the previous example again. You are placing 10 trades and you do not have any risks to reward ratios. Without this strategy, you will never know how much you are going to make or lose. It will depend on your luck and the market trend. Think of a second where you have a risk to reward ratios and you risk your $1 for making $4 profit and $2 of loss. You have won only 4 trades and you have lost 6 trades. Without risk to reward ratios, it is pretty easy to say that you have lost money in the market. But when you have risks to reward ratios, you will have still $4 profit in your account’s is for $12 and you have made a profit of $16 in your only 4 trades. This is how this strategy works in the investment world.