The operation of the forex risk

Although most traders focus on potential Entries, risk management more attention should be paid. Good risk management allows us to know exactly when to get out of the market, and we have such a solid plan to abandon the position if the price turns against us. Today we will focus on the first step of risk management, as we get to know the risk-return ratios.

Learn Forex -USD/CHF 4-hour channel

(Created Using FXCM Marketscope 2.0 charts)

So what exactly is a risk-reward ratio? This ratio refers to the number of pips that we expect to win on a trade as a profit, compared to what we risk in the event of a loss. If we know this function, the control of risk is simply because traders will intuitively recognize exit points for their trades. The key is to find a positive relationship for their strategy and apply it repeatedly with your positioning. Let's look at an example of a positive risk-return ratio at:

The graph above shows an example of channel-Trade the USD / CHF. Traders who try a swing to trade, should enter the market with a bounce from the lower support line near 0.9580. If exits are placed on a channel-Trade, stops should always be placed outside of the support or resistance. In this example, the stops under the support near 0.9465. If the course through this level falls through, we would get off with a loss of 115 pips. To create a 1:2 risk / reward ratio, we would have at least twice as much profit with the position with limit orders, achieve at 0.9810 or better. Now that we know a little bit about risk-return ratios, let's look at why they are so important.

Excerpt from "The error number one, to commit FX Trader" by David Rodriguez

Traders who are well versed in terms of the risk-return ratios, in the end always know exactly how they make the mistake number one, the forex trader can avoid. Based on a study of FXCM analyst could calculate that while most trades closed with profit, the losses continue to exceed the profits far as traders more risk in losing positions than the value that they collect at a profit. This is because traders apply a negative risk-return ratio and thus require a much higher percentage of income to compensate for their losses. In the graph above, we see that the average profit of the USD / CHF is only just 44 pips while the average loss is closer to 90th

This scenario can be completely reversed, at least if one uses a risk-reward ratio of 1:2 to bring the biggest profit on winning trades and simultaneously limit the losses if a trade moves against us.