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So after you saw how important to traders is risk management, now is time to talk more about profit and special ratio between risk and profit. Profit must be higher than risk.
Like real world you can’t spend more money than you get. The same principle is forex trading you can’t enter a position if your profit could not even cover your risk. You can’t afford winning 30 pips against losing 40 pips that is bad money management.
There is a ratio between risk and profit(reward) we recommend ratio 1:3. What does it means – you risk 1% of your account to profit 3%. If you give yourself a 1:3 or even 1:2 risk/reward ratio, you have a significantly greater chance of ending up profitable in the long run. Why’s that? Let’s do simple math:
We’ll risk 2% of account for risk/reward 1:3 and have 60% winning and 40 losing trades. You’ll have 6 out of 10 winning trades. At every trade we risk 2% and we lose 4 trades so we have 8% lost from our account but we have 6 winning trades with risk/reward 1:3 that means the we have 36% reward. If we take the losing percent form winning we have 28% increase of our trading account.
Adopting this money management rules in the long run it will dramatically increase your chances to succeed in making stable profits. If are disciplined trader and respect your trading plan and money management you’ll making lots of money in long term run.