Know more about Forex Risk
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A forex trader will often encounter the term 'risk/reward ratio'. What
does this tem actually mean? Would understanding this ratio bring a lot
of profit to a trader?
DefinitelyRisks are part of trading,
and each trade will bring its particular level of risk. Forex is a world
of risks, possibilities and probabilities. As a trader, you should know
the risk amount that a trade has. By doing so, you can limit losses,
and you'll protect your trading account. The risk/reward ratio is one of
the best tools for risk management, and it's best to know more about
it.
Here is more information about the risk/reward ratio.
Risk/Reward Ratio DefinitionThe
risk/reward ratio is a term used by traders and investors to compare an
investment's expected returns to the risks taken to get these profits.
It's a parameter that determines a trade's risk levels. It shows how
much you'll be risking compared to your potential profit or reward on a
certain trade.
This ratio applies to the trade's stop loss point, and the exit or target point of a trade.
How to Determine Risk/Reward RatioThis
ratio is mathematically calculated by the manner it's written: you have
to divide the amount of money a trader stands to lose if in case the
price will move to an unexpected direction (the risk) to the profit
amount the trader will expect to make if the price goes well, and the
position is closed (the reward).
A Good Risk/Reward RatioThe
minimum forex risk/reward ratio is 1:2. A larger trade will be better,
preferably. For beginners, an acceptable ratio is 1:3, and a lower ratio
is more risky and should be avoided. Don't go into trading if the risk
is equal to the reward, perhaps 1:1, as well as a trade where the risk
outweighs the reward.
Some experienced traders won't enter trades
if the ratio is not 1:5 or higher. It might take a while before they
can find such trade, but the profit can be really worth it. A higher
ratio is advisable: if the currency pair won't make your expected price
movement, you'll still gain profits from it. A lower ratio will have
smaller chances of profit, and higher risks will take place.
Importance of a Good Risk/Reward RatioThe
risk/reward ratio is an important trading tool, and it's necessary for
starting traders to take some time in performing this task; it helps
minimize risk in trading.
Waiting for a good risk/reward ratio is
tedious and time-consuming, but the rewards are endless - definitely
worth the patience and the effort. You'll find the risks involved and
you'll be likely predicting the potential profit. You'll also realize if
the trade you're getting in is worth the money you're spending.
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