There is no better Forex risk reward strategy other than that which enables you to multiply your potential income per trade with multiples of the risk which you are taking.
Let’s label our risk with letter R. If you have learned and are trading a Forex risk reward strategy that gives you 2R or more per trade, you will definitely have some sort of trade insurance for the subsequent trades that you will be taking in the market.
Looking for secrets that millionaire Forex traders use? Read this post to gain insights.
Even if you have not sharpened your ability to identify trades with the best possibilities of ending in the money yet, you will still make money because the best traders are those who stick to this principle of best risk reward ratio.
Forex risk reward strategy
You have spotted a good trade set up and are now thinking about taking the chance. What should you do? Enter it immediately or think about the amount of dollar you will risk to earn a certain dollar amount?
I’d enter this trade setup when I have defined the risk (R) that I am willing to take to gain a certain reward.
If you define your potential reward before anything else, you will be acting based on human greed. You will end up placing your stop loss too close to your entry, and that will not give you the chance to ride the wave and take your profits. Instead, you will be kicked out of the trade prematurely.
Basically, a good Forex risk reward strategy calculates the risk first before figuring out the potential reward.
What we are trying to do here is to focus on the risk so that we are aware of the risk involved. We are also trying to avoid getting too fixated on the potential profits that we could make.
In the end, you will become a ”risk manager” as opposed to just a trader. A risk manager is the best trader because apart from trading, they are effectively managing their capital to ensure that they can preserve both capital and profits in the long run.
On the other hand, a trader is just trading the markets and giving little thought on risk management.
And of course with good Forex risk reward strategy, we are looking at a ”high quality” trade setup that will give us potential profits in multiples of risk taken.
You should be able to mark those points on your charts for convenience. If you still don’t understand what we are talking about here, I suggest you read this basic guide first, then come back here ready to make money as a ”Risk Manager” and not just a trader.
Depending on the direction that the market is likely to take, you are supposed to draw a line that marks your target Take Profit in terms of 1R, 2R, 3R and so on.
These are called reward levels, and are often used when employing a trailing stop. This would mean that for every 1R risk that you are taking, you are setting up yourself to making 3 times the amount of risk should the trade end in profit.
You can consider this as your trade insurance. There is no other Forex risk reward strategy that works like magic.