Any kind of trading in the Forex market will involve risk, however there is also the potential to realise a very substantial profit through trading. When getting involved in this type of trading, it’s important to know at all times what the risk-to reward ratio currently is, as this will help you to decide whether you should enter into a trade.
The risk to reward ratio is used by Forex traders to determine how likely it is that they will make a profit in comparison to how likely it is that they will lose. The vast majority of Forex traders will use a 3:1 reward to risk ratio, which means that there the potential to make more than three times what you might lose in the trade. If the trading system which you are using is able to predict winning trades even half of the time, you can gain a profit with this kind of ratio.
If the Forex trading system which you are using has proven itself to be highly accurate, then you can consider lowering your risk to reward ratio. For instance, if you decide to reduce your ratio in trading to 1:1, you will be able to continue to make a profit provided you win on more trades than you have lost on. This lower ratio can be very profitable if the trading system you have in place predicts winners 60 to 85 percent of. To decide on which ratio you should use, you must examine what your systems winning percentage is.
Almost every trader in the Forex market will use a stop loss order at some point; this is a very valuable and easy way to prevent the risk of loss. It consists of ordering the broker to automatically exit you from the trade when the price reaches the threshold which you have given them. After entering into a trade, most traders will get used to adjusting their stop loss order according to the behaviour of the trade, so as to raise the reward to risk ratio, and reduce the chances of a loss. Once the trade has moved to a particular level, you can choose to move the stop loss to a point where you will break even, and as the trade moves further, you can move the stop loss accordingly. This means that you may be able to make a profit, even if there is a reverse in the trend.