Risk to Reward Ratio
Posted on December 10th, 2008 by Tom Flora under Forex Trading.
Tags: Pip, Ratio, Risk, Risk to Reward Ratio, Trading
Lets talk about Risk to Reward ratios.
At the risk of you thinking that I an nuts, I am going to prove to you that you can still make money and only have 3 out of every 10 trades be profitable. I am not at all saying that we only WANT 3 of 10 trades profitable though. I am saying that we can still make money IF our risk to reward ratio is correct for the type of trade we are making.
For example. Lets say we are going to buy the EUR/USD at 1.3000 and we use a 40 pip stop. If it can hold over the 3000 mark we feel it has a good chance of moving to the 1.3500 level. So lets do this:
- buy at 1.3000
- stop at 1.2960
- limit at 1.3500
We are willing to risk 40 pips to make 500 this is a bit of a large example but it makes the point. With a 1 to 12.5 risk to reward, we can be wrong most of the time and still make money. 500 divided by 40 = 12.5
Lets say we are wrong the first 7 times we make a trade with a 1 to 12.5 risk to reward ratio.
Trade number 1 we lose 40 pips.
Trade number 2 we lose 40 pips.
3, 4, 5, 6, & 7 we lose 40 pips each time so out total loss is 280 pips ouch
but on trade 8 we make 500 pips. Lets take the 280 pips we lost from the 500 we gained and we still have 220 pips of profit. We could have lost a few more times and still made money on the overall trade.
My point is this. Trading is not about be right. It is about making money. Having a decent risk to reward and a fair trading plan with a known percentage of winning and losing trades will give us the intestinal fortitude (guts) to stick with our trading plan. If you sign up for a live trading account at one of my recommended brokerages on my website and put me down as your referring broker or if I am already your referring broker, and you want some help putting together a trading plan, then send me an email at Tom@Getintoforex.com I am more then happy to help.
Thank You and profitable trading to all of us.
Tom Flora
www.Getintoforex.com
DIFFERENT TRADING IDEAS
Posted on November 16th, 2008 by Tom Flora under Forex Trading.
Trading Ideas
My brother raises some cattle and I am going to explain how that relates to forex currency trading. No it is not such a big stretch to understand this type of trading style. He tells me that when he gets a few head of cattle in from the auction he likes to keep them in a small pen in the barn for a few days so they can settle down and get used to their new environment. Then when its time to let them lose he puts everybody around on notice to be ready. Ready for what? Ready to go after the cattle in-case they charge right through the barbed wire fence and the electric fence and out into the surrounding woods. You see, sometimes they come out easy and are content to stay in the pasture. But sometimes they come out running and go straight through the fences and run for a few miles and it takes a long while to get them back where they should be.
Trading a news announcement is the same way. Sometimes the price just moves out slowly and the price is contained in a tight range. But sometimes it runs hard and breaks the fences down and keeps going. How can we make money on it when it breaks out and keeps going when we don't know if they will run or if they will stay close in? The answer is by using buy and sell STOPS. This is like putting an order just outside the fence. If the cattle (market) breaks the fence then it will likely keep going for a while. So if the market breaks long (up) we need a buy stop order just out side the trading range. If the market goes that far the the news was Strong enough to make it run for a while. We can also have a sell stop order in-case the market breaks the fence down going south. The market will need to go far enough to to reach the stop order to get filled. If the market only goes a little way then comes back and stays in a range then our orders can be removed and no harm done since we will not be in the market at all. There are many ways to trade and it is good to be familiar with the different ways we can enter into the market. The good thing about this type of trading is that you can quickly lock in some profits or at least bring your stop up to break even so we don't risk a good trade going bad. If we use limit orders we often want the market to, say, come down to enter us in then turn and go up (on a buy limit) but if it keeps going down we never have a chance to move our stop in the right direction. One way is not right and one way wrong, it is just different styles of trading that we should at least practice on a demo account so we can use them when the time is right. After all, timing is everything. Education is Paramount and when we are ready to Getintoforex, then we need to be prepared.
Please be advised that the use of stop loss orders may not limit your losses to a specific level as market conditions may make it impossible for the order to get executed at a specific price.
Risk Warning