Risk Reward Management

It is a strict rule, to count in your losses before you count in your profits, this will always help you in the long run, I believe it makes the whole trade easier knowing how much your risk is before you enter a trade, this way you are mentally prepared for said losses, and will stay much more relaxed throughout the trade.

Risk reward and money management in Forex trading

risk reward and money management in Forex trading

Basically the whole game is about money management. You should always have a trade idea, outlining where you want to get into the market, how you place your stop loss, and what your targets are. The idea is to have a target profit of two or three times your possible loss. If you don’t know how to create Forex trade ideas, that’s not a problem, we’ll be discussing a lot of them on this site. You should always aim on getting twice or thrice profits in regards to the loss you could incur on that trade.

Proper risk reward and money management in Forex trading is the key to success

It’s about how much you’re risking on one trade. It should be a reasonable amount of your account that you are willing to wager on a single trade. It should be enough for you to be able to open more trades and be comfortable sitting in the trade for the whole trade idea to work itself out. There will always be losses but aim to get a better win ratio. Your risk reward should also be defined, for example, if I am
risking 50 pips, I’d probably be aiming to make 100-150 pips from that trade or if I’m risking 20 pips, I’d aim at making 40-60 pips or more. How you manage the trade and take profits depends on your trade strategy, which too we will discuss later on. The reason for choosing this scale of risk reward is to safeguard your account as well. Consider you have a 40% win ratio, so out of 100 you win 40 trades i.e:

60 x 50 pips = 3000 pips loss
40 x 150 pips = 6000 pips profit

Total profit = 3000 pips even with a 40% win ratio, imagine what happens if you have a better win ratio.

Now if you are wondering if people actually do make 150 pips profit on a trade? Well it happens more often than you think, you can catch 100’s of pips movement if you just let the market work for you and there are a lot of strategies that safeguard you like taking half profits, or 1/3rd profits and then minimizing your risk by moving your trade to break even hence giving you the free trade. I just love free trades. Of course, The win’s and losses displayed above could vary by pips, there could be some trades out of the 100 trades where you risked less or more, and there could be some where you took less profit and closed the rest of your trade at break even, this was just a way to explain the concept to you. The whole idea is to make sure you’re wagering as much on a trade as you feel comfortable knowing you’re going to ride out the whole trade whether its a loss or if it’s profit, if you’re comfortable throughout a trade you’re probably following all the rules of risk reward and money management in Forex trading.

There is a lot of talk about a 2% rule, you may have heard about it from other traders or websites. For new traders, I’d say start with this rule, it is a safe way to make sure you don’t lose your whole account in the mistakes you make in the beginning. For new traders, a better way to start off is to start with 10% of your savings and see how you do with that.  It all varies though, depends on your account balance and how confident you are with your trade ideas.

Let’s say you started your investment with a $1000 account, your 2% risk per trade would be $20, that would be 0.04 lots on a 50 pip stop loss, depending on the pair, this would ultimately give you 50 trades on your $1000 account. You could also go for a 5% risk per trade if you feel your trade is fundamentally and technically sound and you’re very comfortable with it, then you would be risking $50 with a 0.10 lots trade,  with a 50 pip stop loss or 0.05 with a 100 pip stop loss is the same $50 risk with a wider stop, you can calculate these out easily. We’ll get to stop loss placement later when we talk about support and resistance levels. Your risk management is all up to you.

The whole idea is, to survive to trade another day. There are benefits to this, the fact is the pressure of trading a huge chunk of your account usually makes you stressed out and you can make mistakes. Also you miss out on opportunities of other trades you could pick up to cover that loss, because you’re too stuck up with that one trade. Also on the long run, if you have a good win to loss ratio, you’ll be racking up some decent profits 🙂

Trading without a stop loss is a strict no no, there is a reason why we make trade ideas, if those trade ideas fail, there’s no reason to be in that trade and normally the stop you place are at support/resistance levels and when these levels in the market break, the market leaps on to a new level. Trading without a stop loss you could incur heavy draw-down’s and get yourself in a pressure situation where you do not want to be.

Do you have any rules or tips that help you keep your risk maintained other than these? Please share them so other’s can also benefit from them.

Do you have anything to add regarding risk reward and money management in Forex trading? Please share your ideas.

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Learning FX

The idea is to basically help out others trade and understand the foreign exchange market with more ease. My articles and trade ideas are based on my experience and are for educational purposes only. You can follow our updates on twitter

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2 Responses

  1. May 19, 2014

    […] mentioned in the Risk Reward Management post, you should always risk a certain percentage of your trading account; this is to control your […]

  2. May 30, 2014

    […] Risk reward management […]

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