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Risk Management And Risk Reward Ratio Rules

Risk management rules and risk reward ratio for day trading
The most important topics forex traders need to understand is risk management.

Specifically how to control risk and the importance of a good risk reward ratio. 

Traders need to focus on doing what they can to reduce the size of their losses when they happen.

Trading on a margin account you can easily lose all your money if a trade goes against you and you have have a too big position size for your account.

At the same time, traders also need to optimize their trade size to make the biggest possible profit according to their risk preference  on each trade. 

High potential return equals high potential risk. That's why risk management is important.

By knowing how to manage risks traders can play the long game and consistent profits.

Risk Management Quotes

“Don’t focus on making money; focus on protecting what you have.” – Paul Tudor Jones
“Risk comes from not knowing what you’re doing.” – Warren Buffett
“Frankly, I don’t see markets; I see risks, rewards, and money.”- Larry Hite

What Is Forex Risk Management

Forex market is slated to be among the largest financial markets existing in this planet with day to day transactions exceeding 1.5 trillion US dollars. Individual investors, financial establishments and banks do have great potentiality to make profits and losses. According to the experts, Forex trade risk can be termed to be the potential profit or loss that arises due to changes witnessed in exchange rates. Hence, to reduce such financial losses, it is essential to have in proper place some kind of risk management strategies, precautions and actions. There are many who undertake trading activities in the huge and versatile foreign exchange market. But many are not able make profits that they desire. Some tend to lose their entire capital amount and others fail to derive the expected results. It is just a small number of traders to are able to surpass their expectations. With the market changing at a constant pace, there are great risks that traders are required to put up with. Hence, Forex traders find risk control to be an important and interesting topic.

What Is Risk Reward Ratio RRR?

Your risk reward ratio is how much you risk per trade, relative to how much expect to make. 

When trading you want to a bigger reward than your risk per trade.

A good rule is to only risk 1% per trade.

Following the rule means you never risk more than 1% of your account value on a single trade. 

This does not mean that if you have a $10,000 trading account, you can only take a $100 position, which is 1% of $10,000.

You can use all of your capital on a single trade, or even more if you utilize leverage. 

By using the 1% risk rule means you apply risk management to avoid a losses more than 1% of your trading account.

In forex trading, it is impossible to win every trade, and the 1% risk rule helps protect your account when you lose. If you risk 1 percent of your trading account on each trade, you would need to lose 100 trades in a row to blow your account. 

If beginner traders followed the 1% rule, many would be successfully their first trading year.

Risking 1% per trade may seem like a small amount to some people, but it can still provide great returns.

If you risk 1 percent, you should preferably set your take profit to 2 percent or more. 

When swing or day trading, gaining a few percentage points on your account each day is possible when using this simple rule, even if you only win half of your trades.

How To Manage Risk In Trading

Forex traders can avail several methods to avoid loss from unwanted common mistakes. There needs to be in place a proper strategy and prove trading plan. It should include all details pertaining to risk management. Also, it is to be something practical and easy to follow. According to experts, it is wise to focus upon higher probability trades. A good amount of risk prevails in this industry. Hence, it is not necessarily the very best discipline meant for all investors. Moreover, extra attention needs to be paid to avoid the commonly committed mistakes and to engage in trading activities. The effort and time spent to come up with a trading plan is considered to be a wonderful investment. It can help to enjoy a profitable and rewarding future.

Common Risk Management Mistakes

A fundamental rule to follow Forex market risk management is to not risk much more than what can be afforded. But this is found to be a commonly committed mistake mostly by amateurs and new entrants. Being a highly unpredictable market, the traders eager to invest more are likely to get vulnerable to the risks faced in the market. The Forex market is prone to be affected by just about anything. It can even be a small piece of news, which is likely to affect the rates of any specific currency in positive or negative way. It will be useful and wise to trade in conservative amounts of capital and follow moderate path.

Best Risk Reward Ratio For Trading

Without having solid and realistic forex risk management strategies in place, the chances of losing out everything are very high. Risk management, according to the experts, are actually ideas helping to reduce losses and to optimize protection to investors. It can include limiting trade lot size, trading during certain days or hours only, hedging and to recognize the right time to take losses. These measures however, are not implemented by majority of the traders, as they make risky investments by using leverage. But many are not able to succeed in the long run with their execution, since the risks of losing all is more. As a responsible trader, you need to undertake adequate precautions.

How To Build A Risk Management Strategy

A powerful and effective risk control strategy is to know when to cut on losses, which can be achieved with ‘hard stop’. In this method, a well known trading platform technology is used to lock the stop loss at specific level. It can also be achieved with ‘mental stop’, where you need to determine the drawdown limit on the trade and to exit at certain point. 

While it is good to make use of reduced lot size, trying to open up multiple lots using currency pairs is likely to cripple you. If you go long on CHF/USD and short on USD/EUR, then you are likely to get exposed over two times to USD. In case, USD tumbles, then you are likely to suffer from double loss. However by limiting overall exposure can help reduce risks and to increase long term prospects. By limiting risks, you will be in a position to be in the game and to enjoy trading, even during turbulent times.

Swing vs. Day Trading Time Value

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Johan Nordstrom Professional Trader Risk Management
I'm a family guy in my late 20's who learned how to trade the markets in a simple yet effective way. During university I studied investing and graduated with a master's degree in risk management. Quickly, I realized that I was onto something. I started helping friends and taking students. My students started getting results, spent less time in front of their screens, and their accounts grew consistently. Learn more about me here.
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