Level of Risk and Profitability In Forex Trading
Continuing previous education articles, Forex Trading Concepts and Margin and Leverage, this time we will discuss how much the Risk Level and Profitability Level if we plunge into the Forex business.
Every business always has two opposite sides of risk and profit (profitability). Of course, what we want is profit. However, in forex business known high risk high return, high risk business. If we want big profits then there is a big risk also lurking. We may lose all the paid capital but can also earn profits up to hundreds of percent in a short time. All that can be done with relatively no large capital with the concept of Margin and Leverage.
Easier, we will illustrate by example. Pras purchases 1 Lot GBPUSD at 1.29000 level. Pras will benefit if GBPUSD strengthens (price moves up) but on the contrary Pras will experience a loss (risk) if GBPUSD weakened (prices move down).
The possibility to get caught in risk is what to watch out for. Therefore, to succeed in trading risk restrictions are required through the RRR tool. That is Risk Reward Ratio or Ratio between Risk and Profit level. Each position we will take, should we measure the distance between the possibility of risk (stop loss) and profit (take profit). How to determine the level of stop loss and take profit will be discussed in the next article.
The normal RRR level is 1: 1. That is, if we are able to risk $ 500 then the profit level we use is also $ 500. Using RRR 1: 1, if in 20 times trading, conditions are at risk 10 times and get profit 10 times, then our trading result will break even.
Better if RRR level 1: 2. That is, if we are able to risk $ 500 then the profit level we use is $ 1000. If in 20 times trading, the same conditions with the above, then our trading results will remain profitable.
However, it is better not to use a 2: 1 RRR level, which is a risk level that is twice the profit level we use. Our trading results will be a loss.
Treating a forex business as an investment that can be measured RRR level is a wise step to achieve this business objectives.