Risk Reward: Get the Most Out of Your Forex Trading Strategy
Risk reward is key to Forex trading success. What exactly is risk reward though? Well, to put it succinctly, it is the comparison of the risk involved in a trade to the potential reward it can bring. Risk reward ratios are very simple to calculate and understand, but their implications on your trading are profound and so it is necessary that you understand the power of risk reward if you want to get the most out of your Forex trading strategy.
• How to calculate the risk reward on any Forex trade:
1. First off, you need to figure out where you will place your stop loss. Stop loss placement is very important and you should choose the most logical position for your stop loss based on the current market conditions and market structure. For example, in a volatile market you are likely to need a larger stop loss than you will in a quieter market. Also, be sure to take into account any nearby support or resistance levels when placing your stop loss. These levels can be great “natural” barriers to place your stop beyond. Essentially, when pick your stop loss level, do NOT pick it based on the position size you want to trade, instead you need to pick it based on the most logical and “safe” place to give your trade maximum room to breathe.
2. Next, you need to figure out whether or not a profit of at least 2 times risk is possible. This part can be a bit more difficult because it’s very easy to make up all kinds of reasons for why any particular trade just “has to” go a certain distance in the market. But, you should again take into consideration things like current market conditions, and market structure (support and resistance levels) when figuring the potential reward in a trade, just as you would in figuring a potential stop loss.
However, this is not an exact science by any means. If you have truly mastered your Forex trading strategy and you think it’s the best forex strategy, you should know exactly what type of setup you are looking for in the market. You can then make sure you only take A+ trade setups in order to give yourself the best chance of making money in Forex. Taking only A+ setups will help you reach your rewards easier simply because an A+ setup has a better chance of working out in your favor than a B or C setup. But, you have to make sure you really KNOW what an A+ trade setup looks like. This is a result of obtaining an effective Forex trading education on a truly effective trading strategy and from a truly effective and genuine Forex trading mentor.
• Conclusion
If you are not currently calculating the risk reward on each trade you take, you need to be. This needs to be done prior to entering a trade. It will help you think about the market in probabilities, learning to think in probabilities is key to becoming a profitable trader.
