One of the worst situations to find yourself in when trading in foreign exchange Sydney is insufficient capital. Someone with limited funds is going to worry more about the losses sustained. Anxiety can creep in and before you know it you are unhappy with your trading. Losses are a part of the market whether you want them to be or not. The market is not under your control, so it can react against the position you placed even if you have the best skills in the world. Part of understanding how much capital is required is the risk-reward ratio.
Foreign Exchange Sydney: Before Risk Ratios Discipline is Necessary
Discipline is a topic mentioned in a variety of forex articles because it matters greatly. Without proper discipline you are going to burn through your money faster. Your behaviour needs to master discipline ensuring you are following your strategy, entry plans, and other parameters for foreign exchange Sydney.
The Risk-Reward ratio helps you understand what you need to break even in your trading system. Some people swear by this concept. Others do not like it as much. You are going to decide what you prefer.
The risk to reward can be in pips and in per cent. If you have 40/20 or a 2 to 1 ratio it is 67%. If you use 40/40 that is a 1 to 1 ratio or 50% then you have 40/60 at 1 to 1.5 or 40%. What does this mean to foreign exchange Sydney?
The easy answer is if you use a 2 to 1 risk to reward then you would end up with 67% needed to make up the loss you sustained on a transaction. If you use 1 to 1.5 that is 40% at risk that you need to make up.
Foreign Exchange Sydney Example Ratio
To make it easier to understand, say you risked 100 pips on a stop loss but you only hoped to gain 10 on the trade. It does not make sense because if the loss happened and you lost 100 pips you are down a lot of money. Yet if you decided that you could only make ten and risked ten, then you can at least break even.
Calculations and stats can be highly confusing so let’s take a different look. You bought into the market at 1.200 with a stop loss at 1.190. You intended to make 10 pips. Lucky for you, you decided to use a trailing stop. The rate went to 1.210 and the stop loss moved to 1.200. You gained 1.210, but you did not sell out quick enough so the stop loss was enacted. As a trailing stop loss in foreign exchange Sydney you actually broke even. If you had set the stop loss at 20 pips so 1.180 but only gained 1.210 you would have come out with a loss when the rate fell triggering your stop loss. The sale would happen at 1.190 since that was 20 away from the increase that occurred. You never want to risk more than you think to gain.