The Secret Formula to Successful Forex Trading is Risk Reward Ratio
The secret formula to successful Forex trading is the Risk Reward Ratio of a strategy.
Evaluating the ratio and the success rate of each trade will help a trader develop confidence and trust when entering a trade.
Let’s take a look at The Secret Formula to Successful Forex trading Risk Reward ratios that I work with;
One of the trading strategies that I work with uses a 2:1 Ratio. Depending on market conditions I will use various stop losses but for this example we will use a 17 pip stop loss.
So here is how it works, if I take 10 Trades of 1 lot each with a 2:1 Ratio, I know that my strategy has to provide me with a minimum of 40% winning ratio to achieve a successful trading result.
Trading 1 lot with 6 losing trades with a 17 pip stop loss = ($1020.00)
4 winning trades with a 34 pip limit = $ 1360.00
Total Profit with 10 trades = $ 340.00
This proves that although I am getting less than 50 % of the trades I take correctly I can still achieve a successful outcome. The risk reward ratio is balanced in my favor.
On the other hand if we use this same ratio but inverted with the odds working against us, we would need to be successful 70% of the time to achieve profitable results.
Trading 1 lot with 7 winning trades with a 17 pip limit = $ 1190.00
3 losing trades with a 34 pip stop loss = ($1020.00)
Total Profit with 10 traders = $ 170.00
So understanding the risk reward ratio your strategy is best suited for, lye’s The Secret Formula to Successful Forex trading.
A successful trading strategy provides a trader with a plan for entry and exit. You know what to expect, so all your decisions are based on the expectation of that out come. And only when the trade does present the right conditions will you act.
The only thing remaining in this trade to do is manage it, if it goes your way simply follow with a trailing stop, as the trade moves further away from the entry point. I like to lock in 17 pips once the trade has moved 25 pips above my entry price.
Note that the example I have presented here is for educational purpose only. I apply the above example under certain market conditions, which are not explained here.
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