|
Forex Trading |
Written by Dailyfx.com |
Friday, 13 November 2009 01:30 GMT
|
Trader A has a win percentage of 75% on all trades while trader B has a
win percentage of closer to 40% on all trades. Which trader is more
profitable?
Of course we can’t answer that as we don’t know how
much each trader makes when they are right compared to how much they
lose when they are wrong. So the win percentage is not the most
important factor in trading. I’m sure that we would all like
to win most of our trades, but if our goal is to be profitable, then
there is more to the equation. It is called the risk:reward ratio and
is one of the most important aspects of money management and a key to
becoming a consistently profitable trader. Let’s take a look
at some examples:
If you risk 100 pips and look for 300 pips in profit, your risk:reward
ratio is 1:3 meaning one pip of risk for every three pips in potential
profit.
If you risk 100 pips and look for 200 pips in profit, your risk:reward
ratio is 1:2 meaning one pip of risk for every two pips in potential
profit.
If you risk 100 pips and look for 100 pips in profit, your risk:reward
ratio is 1:1 meaning one pip of risk for every one pip in potential
profit.
If you risk 100 pips and look for 50 pips in profit, your risk:reward
ratio is 2:1 meaning two pips of risk for every one pip in potential
profit.
If you risk 100 pips and look for 25 pips in profit, your risk:reward
ratio is 4:1 meaning four pips of risk for every one pip in potential
profit.
So trader A would not be profitable using a 4:1 risk:reward ratio while
maintaining a win percentage of 75%. On the other hand, trader B using
a 1:2 risk:reward ratio while maintaining a win percentage of 40% is a
profitable trader. I would recommend that new traders use a 1:2
risk:reward ratio in their trading. If you open a trade with a risk of
25 pips, then try to get twice that or 50 pips in profit. I would also
recommend moving your protective stop up to breakeven when the market
moves halfway to your target. An example of this would be if you bought
at 1.2500 and placed your protective stop at 1.2475, your risk is 25
pips. Using a 1:2 risk:reward ratio means placing your limit order to
take profits at 1.2550 for a potential gain of 50 pips. When the market
moves up halfway to your target which would be the 1.2525 level, you
move your protective stop from 1.2475 up to your entry level of 1.2500.
At this point, you can only win or break even on the trade. Then you
can spend your time looking for the next trading opportunity instead of
following the current trade.
Written by Dailyfx.com
 |
