Risk-Reward: The Minimum You Should Aim For

Filed under: Learn Forex Trading |

I have talked a lot about risk-reward during the articles on this website, and for good reason. The concepts of risk and reward are key to your success in trading the forex markets. You determine your risk by setting a stop loss and working out your lot size based on how much you want to risk on that particular trade. This is a little bit complicated and requires some maths, but you can work this out on online position size calculators such as the one at:

 

http://www.earnforex.com/position-size-calculator

 

So, to do this, you need to decide on an appropriate risk level. A general rule of thumb is not to risk more than 2% of your bank on any one, single trade. If you risk more than this, then you do put your trading capital in danger. You really do not want to have a maximum drawdown of more than 30-40%, so with this in mind, risking 2% per trade is actually more than enough. Personally, I am even more conservative than that and only risk 1% per trade.

 

Once you have determined your risk, you need to see what the potential reward is. If there is a level of resistance close by and there is not much room for the trade to move in to, then you might find that the potential reward is quite low. If the potential reward is less that two times what you are risking, then I would stay away from the trade. You want to be looking for a reward of at least two times your risk, with some people saying that three times your risk is the minimum that you should be looking for. Personally, I find a reward of two times my risk to be adequate; and anything more than this is a bonus.

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