3. Calculate risk / reward ratio before entering a trade
When chances to win in a trade are smaller than potential losses, don't trade! Remember — staying aside is a position.
For example:
losing 40 pips versus winning 30 pips,
losing 20 pips versus winning 20 pips,
both examples are showing a bad risk management.
Before entering a trade, reassure that risk / reward ratio is at least 1:2 (but ideally 1:3 or higher), which means that chances to lose are tree times less than promises to win. For example: 30 pips of a possible loss versus 100 pips of a potential win is a good trade to consider taking.
Adopting this money management rule as a must, in the long run it will dramatically increase your chances to succeed in making stable profits.
Next chart shows the risk / reward rule in practice.
10 trades with 1:3 risk / reward ratio were conducted.
A trader was losing only $100 in a trade when he was wrong, but was winning $300 in each profitable trade.
As we can see, using 1:3 risk / reward ratio constantly and being successful only 50% of the time, anyone can make a profit in the end. The higher the reward ratio (compared to the risk ratio) the better are chances to end up in profit.
When chances to win in a trade are smaller than potential losses, don't trade! Remember — staying aside is a position.
For example:
losing 40 pips versus winning 30 pips,
losing 20 pips versus winning 20 pips,
both examples are showing a bad risk management.
Before entering a trade, reassure that risk / reward ratio is at least 1:2 (but ideally 1:3 or higher), which means that chances to lose are tree times less than promises to win. For example: 30 pips of a possible loss versus 100 pips of a potential win is a good trade to consider taking.
Adopting this money management rule as a must, in the long run it will dramatically increase your chances to succeed in making stable profits.
Next chart shows the risk / reward rule in practice.
10 trades with 1:3 risk / reward ratio were conducted.
A trader was losing only $100 in a trade when he was wrong, but was winning $300 in each profitable trade.
As we can see, using 1:3 risk / reward ratio constantly and being successful only 50% of the time, anyone can make a profit in the end. The higher the reward ratio (compared to the risk ratio) the better are chances to end up in profit.
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