RISK & REWARD

This is a highly talked about topic within the industry. A ton of educators and traders have varying degrees of Risk Management and at the same time, have different feelings on what the risk:reward ratio should be and I am no different. However, I would go as far to say that most would agree that having a bare minimum of 1:1 is the worst you should aim for.

But before get into better Risk:Reward ratios let’s talk about why this is. I love to play blackjack at casinos. It is one of my bad vices but I have rules I follow but If I risk $10 on my bet and I win, I get $10 plus get to keep my original bet. It’s a nice one to one Risk:Reward. Even better is when I hit blackjack on the deal, I get even more money off my bet. With that being said, would you bet $10 to win $5 on a game of so-called chance? I don’t think so….Why? The reward isn’t even to the risk.

In another example. Let’s talk Real Estate. Why do you buy a house? For better accommodations, as an investment property, to have an asset, or all the above. Now you buy said house for $200,000 Cash. After fifteen years, you decide you want to sell. What would you sell it for? $100,000? $150,000, $175,000? $200,000? Or $250,000? If I had to guess on what you chose, I would say $250,000. The answer Is easy because you want the most return. Now assuming selling conditions are good as well as your financial status, you would shoot for the $250,000 selling price. However, anything below $200,000 now that house just cost you money. What a bad investment!

In the forex market, the bare minimum, no matter what to shoot for is a 1:1. Is that Ideal? No because you are required to win a lot of trades to not only have a winning average but at the same time, keep your account size growing in the positive direction. Ok, ok, I get it. Right now, you are probably saying to yourself, this is basic stuff that I know, what in the world is the point of this?

Well last night, I was scrolling through Instagram and saw a post about a trade idea. Now based on the information that was seen, the trade could have gone either way but, that’s not what got to me. The trader decided to go long with a take profit of 22 pips and risk of 38pips. Is this a good Risk:Reward? The trade did go in his direction but however, if he would have done the minimum of 1:1 he would gotten more pips too because it spiked up. 16 extra positive pips on your trade can be huge depending on what lot size you are trading. But now if he would have lost the trade. He is down 38 pips. He takes another similar trade and wins but the trader is still down on the day because their Risk:Reward can’t even make up for the original loss. Which brings me to my next point!

I like to tell people to always shoot for a 1:2 on your trade. If you are risking 5 pips, aim for a 10 pip win. If you are risk 20 pips, aim for a 40 pip win, and so on and so on. This will allow you to have a lower winning percentage but, more importantly, be able to grow your trading account and be profitable. Why because if you lose one trade on a 1:2 of 20 pips. But then you win the next trade on 1:2 risk 20 pips, you just made 40 pips on trade and are net 20 positive pips for the day.

Take a look at the chart below

Requirements To Break Even:

So the better Risk:Reward scenario you opt for, the lower winning percentage you need to have to breakeven. However, if you opt for the lower Risk:Reward scenario you better be really good, otherwise say goodbye to your account. We want to be able to trade the next day and grow the account at the same time!! So as the saying goes…

Let your winners run and cut your losers early!!!