CarlosNorb

The following two rules are critical to any Forex trader. Make sure you understand them fully before going on with the remaining points. Risk-per-trade Risk-per-trade refers to the maximum amount of risk you’re taking per any single trade. Risk-per-trade is usually determined as a percentage of your trading account size. Let’s say that you have a $10,000 account. If you open a trade with a potential loss of $2,000 (the maximum loss if the trade hits your stop-loss), then your risk-per-trade would be equal to 20%. This example shows how not to trade. Taking a 20% risk-per-trade is way too much risk, as a strike of five losing trades would wipe out your entire account! Even two losing trades would leave you with only 60% of your initial trading account size, and guess what – it takes much more than 40% to return to your initial account size of $10,000. The following table shows how much you need to make to return to your initial account after a series of losses. Amount of balance lost Amount necessary to return to initial balance 10% 11% 25% 33% 50% 100% 75% 400% 90% 1,000% As you can see, losing 90% of your account balance will take a whopping 1,000% growth to return to your initial trading account size. Looking at international Forex tips, the golden rule is to have a risk-per-trade not larger than 2-3% of your trading account size. Reward-to-risk ratio The next important concept in money management is the reward-to-risk ratio, also called the R/R ratio. This refers to the ratio between your maximum loss on a trade, and your maximum profit on a trade. Both categories can be simply determined by your stop-loss and take-profit levels. If your maximum loss on a trade is $100, and your maximum profit is $100, your R/R ratio would be equal to 1. But, if your maximum loss is $100, and your maximum profit $300, your R/R ratio would now be 3. A large survey made by a Forex broker concluded that traders who have R/R ratios higher than 1 tend to be 30% more profitable than traders with R/R ratios lower than 1. In fact, the best trades are those with R/R ratios of at least 2. Why is this so important? Let’s say you open six trades, each with an R/R ratio of 1 and identical risk-per-trade. If you manage to have three winning trades and three losing trades out of the total six trades, you’ll make a total of $0. You’ll stay on break-even. However, if all of the six trades have R/R ratios of 2 (assuming identical risk-per-trades), three losing and three winning trades will now generate a handsome profit, because you’re winning two times more on each winning trade than you’re losing on each losing trade. This is the power of reward-to-risk ratios, making it a crucial part of a well-rounded Forex trading money management system.