A Simple Lesson in Risk Management

Utilising a Risk to Reward Ratio

How many of you obsess over an 80% profitability rate? You may feel the need to be right all the time and cannot accept a large amount of losing trades.

OR

You may think in order to become a profitable trader you need to win more than you lose.

Well it's time to put that aside.

You do not need to have a high profit/loss ratio or profitability rate to become a profitable trader, you can be right just 50% of the time (as shown on the chart) and still make an excellent profit by utilising a strict risk to reward ratio when trading. You can actually have a profitability rate of 40% with a 1:2 risk to reward ratio and still be in profit!

The higher your risk to reward ratio the less you need to be right, many professionals use a minimum of 1:3 meaning they will risk 100 pips to make 300 pips.

I personally use a minimum risk to reward ratio of 1:2... But in order for you to do the same, it has to align with your trading strategy. Do not set unrealistic profit targets in which you will not achieve!

To round off this post I truly hope this explained the positive effects of applying a strict risk to reward ratio in your own trading.

I am available via private message for any questions you may have.

Here's to your success!!!