Wednesday December 28, 2016 - 16:47:51 GMT
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Importance of risk reward ratio in forex trading
Trading can be an extremely difficult task if you relatively new in this industry. Most of the professional trader in the financial industry fails to make money in their trading career due to their lack of trading discipline. If you truly want to become a professional trader then you must have a strong trading discipline and execute you order according to your plan. If you look at the life of the successful forex trader then you will see that most of them are profitable due to strict trading discipline in the forex market.
Those who are trading the financial industry for a long period of time exactly knows how important the risk management factors is. In the forex market if you don’t use proper risk management factor then a single mistake can wipe your full trading account. Most of the novice trader in the financial industry fails to make money since they don’t know how to manage their risk properly. As a currency trader, you must assess you risk very precisely since this is the key ingredient to remaining consistently profitable in the forex market.
Minimize your risk to a great level: They key advantage of using proper money management factors lies behind its versatile use. If you follow strict risk management factors then you will have better chance in the market .On the contrary, those who are trading the financial instrument without any risk management factors end up by losing their whole trading account with the execution of few bad trades in the market. But by the virtue of the proper risk management factors, professional traders always minimize their risk in every single trade in the market.
Allows you to make money even after losing more: If you follow perfect risk-reward ratio in every single trade then you will make money even after losing more trades in the market. Most of the professional traders lose more trade in the market even they remain profitable in the forex industry by the virtue of their excellent risk reward ratio.
Let’s see some live trade examples
Figure: Nineteen trade executed with 1:2 risk reward ratio
If you see the live trade history of that 19 trade then you will see that out of 19 trade 12 trades was a loser and only 7 trade was profitable. For every losing trades the traders lost $ 50 in the market and for every winner they earn $100.So after all the calculation you can clearly see that the traders' is still profitable after the execution of 12 losing trades in the market. He made more than 100$ profit in the forex market. This is just an example of 1:2 risk reward ratio in the market. Most of the professional traders use more than 1:2 risk reward ratio in the market since they know the better the risk reward ratio the more losing trades’ they can afford.
How to determine the risk-reward ratio properly: There is no specific method of determining the risk-reward ratio in the market. Most of the professional traders determine their risk reward ratio based on their trading strategy and trading performance. But as a professional trader, you should use at least 1:2 risk reward ratio in the market. If you don’t follow 1:2 risk reward ratio in the market then you will never succeed in the forex industry. To be honest the expert forex traders always use more than 1:2 risk reward ratio even there are many traders who execute their trade with an excellent risk-reward ratio of 1:5.as a professional trader you should focus on higher reward and try to limit your loss in every possible way.
Use price action trading strategy: There are many different types of trading strategies in the financial world. If you are truly committed in forex trading then you should consider price action trading strategy first. The main reason behind the rising popularity of price action trading strategies lies behind its extremely good risk reward ratio. Compared to other trading strategies price action trading strategies tends to create the best trading result in the market. The moment you will master the true art of price action trading strategy is the very moment you will realize the importance of risk-reward ratio in the forex market.
Follow strict trading discipline: If you truly want to trade the financial market with proper risk reward ratio then you need to follow strict trading discipline. If you are not disciplined in the forex industry then you will not be able to execute high probability trades in the market. Most of the novice trader in the financial industry fails to make money due to their lack of trading discipline in the forex industry.
Summary: Forex market is very much lucrative. Most of the traders come to the forex industry in order to make quick money. But in reality trading, the forex industry is pretty much similar to business. As a professional trader, you must always evaluate your risk in the market. If you don’t know how to manage your risk properly then you will never succeed in the financial industry. Always try to execute your trade with proper risk management factors. If you find high probability trade in the market then always look at its potential reward. Don’t execute the trade in the market if the risk reward ratio is less than 1:2 .Most of the professional traders are making consistent profit in forex trading only by following the simple rules of risk reward ratio. If you truly want to become a professional forex trader then you must also realize the importance of risk reward ratio in this industry.
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