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Posted on May 21, 2015 at 05:43 PM
The number of profitable trades you make in Forex is not the most important determinant of how successful you are
The most important aspect of money management and a consistent profitable trade career is actually your risk/reward ratio.
The risk/reward ratio is a ratio that is used to compare your expected returns on a trade or investment to the amount of risk undertaken to capture these returns.
This ratio is calculated by dividing the amount you stand to loose if the price moves in the unexpected direction (i.e. the risk) by the amount of profit you expect to have made when the position is closed (i.e. the reward).
For instance if you risk 100pips and look for 200pops in profit, your risk/reward ratio is 1:2
A trader that wins 75% of his or her trades and uses a 4:1 risk/reward ratio would not be a profitable trader because she/he is risking 100pips and can only get 25pips in profit.
Here's an illustrative example:
Asuming in a particular month, you place a total of 100 trades, using a risk/reward ratio of 1:2.
Of the 100 trades, you make 60 losses and 40 wins:
Loss per trade - $500
Win per trade - $1000
loss amount = 500 * 60 = $30000
win amount = 1000 * 40 = $40000
Total Profit = 40000 - 30000 = $10000 profit
From the above example it is very clear that even your loss ratio is more than your win ratio, the end result is $10000 profit maintaining a risk/reward ratio of 1:2.
Traders with a healthy money management plan will use at least a 1:2 risk reward ratio in their trading. If you open a trade with a risk of 50 pips, then try to get twice that or 100 pips in profit.
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