Forex

In any trades you make, you should always know your reward/risk ratio. How
much are you willing to risk? What’s your upside (what you think you might
make)? What’s your downside (the amount you might lose)? How much of
your trading account should you risk on any one trade? It’s not as much as
you might think!
Although no one can control which way the market is going, you can
usually control your risk. If you don’t control your risk in trades, you won’t
be around very long to have to worry about it. Would you risk $5,000 to make a
possible $1,000? Those are horrible odds, yet I’ve seen people do this over and
over until they are broke. However, would you risk $1,000 to make $5,000 if
the odds were in your favor? Probably.
The key is to understand the reward/risk ratio on every trade you do and
only trade the ones that have a lot more reward than risk. One way to look
at reward/risk is by remembering the coin toss game we’ve all played as
children. If you played with a nickel and your opponent played with a dime, and
each time you won, he gave you a dime, and each time you lost, you gave him a
nickel, who is going to win in the long run? Of course, you would. You might
lose the first 5, or even 10 tosses in a row, but over time, you would win twice
as much as your opponent, because your risk was 1/2 as much as his. Right?
That’s exactly what we want to do when trading. We want the risk to be in our
favor.
Just like in the coin toss example, we want the odds in our favor before we
make a trade. Personally, I like my students to see a risk/reward ratio of 2:1 or
better. In other words, if you have a chance of making at least $1,500 if your
target is hit, then you don’t want to risk more than $750 on the trade. I’ve seen
trades that have 3:1 or even a 4:1 ratio. I like to see these trades, and you will
too. At times, you can put on a short term trade where you can have a little less
than a 2:1 Reward/Risk ratio, but don’t do it all the time.
You are going to learn how to figure your profit targets and when to get into a
trade a little later. You will also learn how to protect yourself, and how to
control your risk. To do this, you need to know how to use stops