Part 1 – Habits Of Successful Forex Traders: Risk / Reward
While every successful trader has his or her own way of being consistently profitable, there are a few “common denominators” that all profitable traders follow without exception. Chad and I have a combined 17 years of experience in this market, with 8 of those years spent teaching others our forex trading strategies. As you might imagine we have met many traders along the way. As Chad and I discussed this forex training article series we thought of the different common denominators all successful traders we know follow. In part 1 of this training series we will break down risk/reward and discuss its importance if you are to ever profit from the forex market.
Why Is Risk/Reward Critical?
Forex trading by its very nature is a game of statistics and probabilities. Profitability is the combination of a win to loss ratio vs. the risk/reward of those trades taken. Simply put one can be profitable in ONLY two ways. First you can maintain a high winning percentage, or second you can maintain a high risk/reward (R/R) ratio. What though is the common demononator between profitable traders? Without a doubt the answer is risk vs. reward. Those who strive after a win/loss ratio of 80-90% almost always do so at the expense of the R/R ratio, and this is a dangerous trade off.
The best way to illustrate the importance of R/R is to show a real life example of it. Below is roughly a month and a half of Chad’s track record. Let’s break down the numbers….
Winning Trades – 18 (53%)
Losing Trades – 17 (47%)
Average Profit – $1,704
Average Loss – $606
Overall R/R – 2.8/1
Overall Profit – $20,414.33
Does this begin to make clear why R/R is so critical if you are to ever become a successful forex trader. Contrary to the lie many tell….most profitable forex traders win between 60-70% of their trades based on our experience over the years. Over the last month and a half Chad has managed a to turn a profit on 53% of his trades. Would you consider that track record a success? Without a doubt the win/loss ratio is lower than both Chad and I usually average but this so perfectly illustrates the power of the bank trading strategy and its ability to present high R/R trade setups.
Breaking Down The Numbers…
While 4 standard lots is not a huge lot size, most reading this will be trading with an account that is smaller and thus be using smaller lots sizes per trade. To illustrate the power of R/R lets break down the numbers using an account size of $2,000. If you risk 2% per trade that would be $40 risk per trade you take. Thus if you keep the 2.8 to 1 R/R as shown above you would profit $112 on each winning trade. Lets see how this breaks down using the number of trades in the track record above….
18 Winning Trades – $2016 (18 trades X $112 profit per trade)
17 Losing Trades – $680 (17 trades X $40 risk per trade)
Total Profit – $1336 or +66.8% gain
Using the R/R in the track record listed above you could win as little as 30% of the time and still make money! Hands down if your losing money in the forex market it is almost certainly because you have a poor R/R per trade. I strongly urge you to go back through your last 50-100 trades and determine your overall R/R ratio. How then does one increase their R/R properly?
High Risk/Reward Day Trading Strategies
At this point I’m sure you can see the value and importance of maintaining a high R/R in your trading. At the heart of the track record listed above is the forex bank trading strategies. The concept is really quite simple. When the banks enter a trade they do not do so to make a 5, 10, or even 20 pip profit. As we have discussed before because they enter positions over time it takes larger moves in order to exit those accumulated positions. Because of this when a trader has truly identified a high probability bank trading setup the market is usually in for at least a 90 pip move.
Trade setups such as the stop run reversal for example, often allow for -20 pip stop losses….thus a 2 to 1 R/R on these day trades is normally achievable. Additionally trading with the smart money trend generally gives high R/R setups. The key is understanding how the banks move the forex market and taking those high probability setups when at least a 2 to 1 R/R is probable. Doing so is the key to profits like those seen in above!
If you would like to join our community of traders and learn how to trade forex using our bank trading strategies & trade setups then please visit our forex trading course page.
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