Risk-Reward: The Most Important Piece of the Puzzle in Forex Trading

Let me start first with a quote from one of the so-called trading wizards in the arena of currency and stocks trading, Larry Hite: “Frankly, I don’t see markets; I see risks, rewards, and money.” Simplifying how we see the markets will help us simplify our trading and decision-making as well. Risk is something that we cannot avoid once we are trading the markets. As what Anthony Saliba said: “I always define my risk, and I don’t have to worry about it”. Instead of being frightened that Forex Trading is risky, we need to master risk because we cannot really achieve the potential rewards without exposing ourselves to the possible risk. As we can see, rewards are hiding in big risks so unless we master risk instead of avoiding it, we would lose the opportunity to achieve great things.

In my years of experience in Forex Trading and the lessons I encountered along the way, there are three basic pillars that I follow: (1) Price Action Trading (TLP); (2) Risk-Reward/Money Management; (3) Tracking of Trades.

We will talk about Risk-Reward first. Proper implementation of a Risk-Reward plan will help a Trader have a staying power. Let me explain how this goes:

1. Trading results are not determined in just a single trade but in series of trades. What I mean is that, out of 10 trades, you can have 60%-70% losing trades and only 30-40% winning trades but still end up PROFITABLE with positive equity in your trading capital.

2. To properly implement it, it needs a thorough patience to choose a trade set-up that gives Reward at least 2-3 times your risked amount. So if your risk amount is $100, your reward amount target per trade must be at least $200 or $300 for 1:3 risk-reward ratio.

3. Illustration: This is based on 10 series of trades with 2:1 Risk-reward ratio

In the above table, we can clearly see a scenario in which a series of 10 trades was made through a strict implementation of 1:3 Risk-Reward ratio. Out of the 10 high probability trades, only 4 worked out as winner and 6 are losing trades. But as we can see, it turned out as profitable with 60% growth of the capital. The thing is, trading is not about being right all the time. If you really follow a proper Risk-Reward regime, you can still be profitable even though you are wrong 60-70% of the time. That is the reason why you need to trade only high-probability trades that fits your trade plan.

Going Back to PATIENCE and DISCIPLINE

This is a clear reward of strictly implementing a trade plan, sticking into it and entering only HIGH-PROBABILITY TRADES that give us at least 3 times our risked amount. With this,

patience and discipline should be highly applied and to trade only set-up that gives tight stop-loss and so that you can hit a reward 3-times the risk. Many of the traders have trading plans but fail to implement it. They are, some sort of, addicted to taking small profits. The problem with taking pre-matured target profits is that if we will calculate our risk, it will outweigh our profits which will soon blew-up our account. What I mean pre-matured target profits is a profit that is less than twice yourrisd amount. Imagine taking a profit less than our risked amount. Mathematically speaking it is regression.

Following a strict "Risk-Reward regime" with a high-probability trading entry plan can be considered as a 'Holy-Grail' in Forex Trading, a very life-long formula used by trading legends. So what we really can see here is trading is more on an "Inside battle" since we battle with our own self-control. Following a trade plan eliminates emotionally-enduced trading since we simply trust our trade set-up and let the market to its thing. No matter how we are angry at the markets when we have loses, the markets does not have any emotion. The only way to outsmart the market is by conquering ourselves.

Conclusion

As Forex Trading has been feared and tagged by many as gambling (especially those who does not understand Forex Trading), this market gives a very promising opportunity but not to those timid, impatient and undisciplined person. So what we really would like to develop here is ourselves. Money is just a scorecard in the markets. For me, the real reward in Forex Trading is our new-self: a self-disciplined soul that conquered greed, materialism and emotions due to fear and love of money. Honestly, the main reason why most traders are greedy because they love too much money that they sacrifice their own self-control to Get-Rich-Quick but in return lead them to damnation.

The power of Risk-Reward, once implemented with discipline, will eventually reward us with the things we desire in life while at home or spending time with our loved ones. Since we only aim for high-probability trades, it means that we really do not trade that often. Not trading that often means we are not tied up in the markets and we have plenty of time to do things we love to do and spending time with our family.

Join me in my Community: Alpha Forex Trading and we will conquer the markets together by conquering ourselves first.

Have an awesome trading journey!