Thursday, January 17, 2013

"Holy Grail" Of Forex Trading

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How risk / reward can make you a very consistently profitable forex trader.

Ideally, you want to look for trade setups where you have a risk / reward of at least 1 to 2 times. If  getting a risk / reward of 1 to 2 on every trade, you can lose on well over 50% of your trades and STILL make money.

This is why risk / reward is your “holy grail” of forex trading.  If you execute this properly you can make nice consistent money over a period of time. However, a lot of traders mess this up or limit its power by meddling in their trades when they are live, usually by taking less than a 1 to 2 profit, and then entering another trade that has lower-probability, or maybe take a loss.

Once you start this meddling game with your trades , you really put limits on what you can achieve in forex trading.

To play with the numbers let’s discuss a scenario where you lose 65% of your trades, but your risk to reward  is 1 to 2. So, out of each 100 trades you lose 65 of them and win 35 of them, let’s say you risk $100 per trade. This means you lost 65 x $100 = $6500, but  your winners made 35 x $200 = $7000. So, after each 100 trades you have a profit of $500, this is even you lost on 65% of your trades! This is an example of power of risk / reward setups, the trick here is that it takes time to play out, most traders do not have needed discipline to execute 100 trades flawlessly with risk / reward of 1 to 2 and suffer through 65 losses and only 35 winners. The lesson here to be learned from this article is that you still can make money in the forex markets even if you lose  more trades than you win,