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Focus on the Risk and Not the Reward

Author Mr. Zahir.,

Focus on the Risk and Not the Reward.

Focus on the Risk and Not the Reward One of the basic mistakes that beginner traders make is to focus on how much they can earn from a trade without considering how much risk is involved. Thus, when the trade goes against them, they find themselves losing more money than they had expected. The best traders use risk/reward ratios to evaluate trades so that they can determine if they are worth it. This ratio is computed by dividing the amount of money the trader expects to lose by the expected profit when the trade is closed. Focus on the Risk and Not the Reward.

If you manage your risk/reward ratio properly, you can still make money from forex trading even if you lose more trades than you win. You can do this by ensuring that every trade that you make has a risk/reward ratio of 1:2, meaning that for every $1 that you risk, you can potentially earn $2 on a winning trade. To illustrate how this can work, let’s assume that you have a 60% loss rate, meaning that for every 100 trades that you make, 60 of them are losing ones. Let’s say that you risk $50 for every trade. Thus, on 60 trades, your losses are $3,000 (60 x $50). However, on your winning trades, your profits are $4,000 (40 x $100). Thus, you have made an overall profit of $1,000. Focus on the Risk and Not the Reward.

In addition to minding your risk/reward ratio, you should also ensure that the amount of your loss fits within your money management strategy. The basic principle of money management is that you should not risk losing more than 2% of your trading bankroll per trade.

To illustrate how this works, let’s say that you are trading the EUR/USD currency pair and you have set the stop loss at 80 pips. Thus, the take profit should be set at 160 pips. Assuming that you have a trading bankroll of $5,000, how much should we invest in this trade assuming that we want to risk only 2% per trade or $100? Simply divide $100 by 80 pips and you will get $1.25. Thus, you should choose a position size in which every pip is worth $1.25. There are position size calculators that you can find online that will help you easily make this computation based on the balance in your trading account.

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