When a trader comes into the CFD field, he or she automatically connected with the risk. Quantifying the risk-reward ratio means how much risk an investor is willing to take in place of how much returns. If a person is good at risk management skills, he or she will easily able to increase the account balance. Fresher has a little bit of knowledge about the process of measuring the ratio. Most of the time, the professionals also face problems to calculate this properly. This is very necessary for beginners to recognize the significance of risk management.
If you take high risks without considering your income and other factors, your account can be wiped out. This happens with the new investors who do not know how to manage the risk and take some illogical steps which cause great loss for them. A person should be required to make a fruitful money management strategy and execute it in the virtual market. By applying different types of ratios, he or she can easily find out which provides good returns. People should have knowledge about the Forex orders which ultimately helps to reduce the losses.
Risk reward ratio
The ratio between the stop-loss and take profits is called the risk to reward ratio. For example, if the stop-loss is placed at $300, and the take profit is placed at $600, the proportion will be 1:2. On the other hand, if the stop-loss order is set at $200, and take profit is set at $600, the proportion will be 1:3. The experts said that people should prefer the ratio of 1:2 or 1:3 to keep a balance between the cost and savings. An investor should maintain the win rate at least 50% which helps him or her to make good profits in the long run.
The win rate can be required by using the following formula that is, Win rate = 1/ (1+ancient proportion of the person’s business strategy). So, if anyone maintains the proportion 1:1, the win rate will be 50% according to the calculation. The rule of determining the minimum proportion is = (1+ancient ratio of the person’s business strategy) -1. So, if the win rate is 50%, the minimum rate will be 0.5.
Some of you might get confused with this complex math. Let’s break it down for your better understanding. If you risk $10, then try to earn at least $20 from the trades. But to make money from this method, you must win 51% of the time. Learn about professional strategy at Saxo and trading will become easier.
Utilizing the Third Tools
People can also use other software and instruments for measuring the ratio. If the investor tries to measure this manually, it will take time. So, the UK traders can use some software for doing this. People can use Microsoft Excel sheet, Forex calculator, and MetaTrader4. If any business search in Google for the calculator, he or she will get many customized indicators which will help them to this smoothly. The traders can also use the Fibonacci Retracement Tools which measure the Fibonacci retracement levels drawn from key swings, with little changes to the support and resistance level. People can make the use of these instruments visually to identify the proportions.
To manage the money in the Forex market, people are required to understand the basics of this. This is not possible that at the beginning level, you will able to learn everything. You have to spend proper time and have to acquire proper cognition so that you can able to understand the pros and cons of every market condition. As well as developing the technical knowledge, an investor has to improve the necessary trading skills which will enable them to grab the chance of making money. For better performance, a trader needs to identify the minimum win rate so that he or she can apply their strategy depending on this.