Monday, 18 February 2008

Make Sure You Win At Forex Trading

We said at a very early stage that when trading Forex you cannot expect never to have losing trades. NOBODY in Forex trading wins every time. What separates successful Forex traders from unsuccessful ones is that the successful ones have worked out ways of putting the odds in their favor.

If you trade with a 1:1 risk-reward ratio, after 100 trades you should theoretically break even (end up with the same amount of money in your account). In order to manage risk effectively, it is necessary to find high-probability trades that have a 1:1.5 or greater risk-reward ratio. Most advice is to go for a risk-reward ratio of 1:2 or more.

So supposing you are going for a 40-pip trade, you set your reward for 40 pips and your stop-loss order for 20 pips below the entry order. Suppose too you are trying out the 1:2 ratio, and you are only right 50% of the time (though you will probably do better than that). If you make 4 trades, two of them winning and two of them losing, you have made 80 pips and lost 40 pips (2 x 20 because you had a 20-pip stop-loss order).

The lesson is - ALWAYS calculate your risk-reward ratio BEFORE making a trade, and refuse potential trades unless the ratio is at least 1:1.5 or preferably 1:2 - that is, for every dollar risk there is a potential for 2 dollars gain.

Easy-Forex will teach you much more about managing risk. Keep an eye on for answers to more of your questions.


Unknown said...

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analyzing markets and predicting trends: Technical Analysis and Fundamental Analysis.

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