This is actually one of the most important lessons you can learn about Forex trading. I have seen great systems that failed on poor risk management. Greed is what is driving us to the abyss. Or in other word, emotions.
Nothing new, right?
I will show you how you can stay in green line if you will learn this most important lesson in trading Forex.
WHAT IS CALCULATED RISK?
Calculated risk has an element of controlled and expected outcomes. We analyse the market, measure our odds, calculate risk to reward ratio and make a call.
So how to become successful in Forex?
RISK TO REWARD or RR
Risk to Reward is a ratio between your stop loss size and profit in a single trade.
Why is that so important?
Most amateurs can achieve up to 50% win score. Professionals gets from 55-70% (I am at 66%), but you can make profits even with as low as 40% win rate. If you have RR of more than 1.5
So that your winning trades, deletes one and half of losing trades.
Some say that amateurs should aim for 2 RR, but this is way too much and hard to achieve. So I recommend aiming for 1.5 RR
How to calculate your RR?
You need to know your levels. Entry point, stop loss level and take profit level.
Then you need to calculate your stop loss size.
If your start price is at 1.7050 and you are buying and you set for example stop loss at 1.7015, then your SL size is 35 pips.
Same thing for TP (taking profit). If you put to exit at 1.7095 , then your TP size is 45 pips
RR = TP / SL
1.28 = 45 / 35
Our RR is 1.28 which is ok if you are an experienced trader.
The formula above is meant to be a simple, mathematical way to decide if the risk you’re about to take is a smart or dumb one.
Requirements to Break Even
If you don’t use stop loss, then you can’t benefit from risk management or calculate it. In the long term, you are likely to burn your account.
It’s easy to hit your SL and still be right about your analysis, so that generates great frustration. To put an end of that frustration, some traders choose not to use stop loss. And that is good for some time. But what when we get into a big trend and in the oposite direction from us? How long will you stay in that trade? One single trade can take away 50% of your account, and if the move is big and sudden, you can even burn your account that you built for months, in a single day.
When I started trading, many years back, I did all mistakes a rookie can make. No stop loss, fixed lot size, no risk management at all. And I burned few accounts in the first couple of months. Then I stoped with trading and educated myself further and as soon as implemented proper risk management, my skill improved drastically.
One of the BEST FOREX EA , Ultima EA, is using advanced risk management. Not only it always calculates risk size, but is also taking advantage of current market condition and is trying to generate for you even higher RR than expected.
Feel free to contact me and I will share with you for free indicator for MT4 for calculating risk size.