Wednesday, October 20, 2021

New Money Management Method In Forex: Profit-Holding

Some of you may hear the term “Profit-holding” for the first time. This is considered one of the most difficult ways to manage money when you trade in the market. To help you understand it clearly, I will share 3 things in this article.

  • What is Profit-holding?
  • How to use the Profit-holding money management method?
  • Why should you learn this?

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What is Profit-holding?

Profit-holding means that you will keep the profits earned (no profit-taking point) and continue to open positions (orders) according to the trend you have predicted.

The more the price goes right, the more orders you open. The act that you open more and more orders is called Stuffing. When the price reverses, close all orders and leave the market.

Case 1: Profit-holding + stuffing BUY orders + average price increases

For example, this is a bullish segment of EUR/USD. I stuff BUY orders based on the EMA34 combined with the support zone.

When the price is above the EMA34, you will wait for the BUY entry. The entry points will be when the price retests the support zones and touches the EMA34 at the same time to create reversal candlestick patterns (as shown in the picture).

An example of Profit-holding with BUY positions
An example of Profit-holding with BUY positions

The exit point of all BUY orders is when the price reverses from uptrend to downtrend. The closed candlestick is below the EMA34 and it breaks the support zone.

In short, after entering a BUY order, the higher the price goes up, the more you BUY. Follow the trading method above to find new BUY positions. Only when the price reverses and the market confirms the downtrend, you will close all your BUY positions.

Below is a real trading example of Profit-holding with XAU/USD. Our fund account use this strategy to BUY 4 consecutive orders

A real trading example with Profit-holding method
A real trading example with Profit-holding method

Case 2: Profit-holding + stuffing SELL orders + average price decreases

I give an example of the gold price (XAU/USD) in a bearish cycle and use the Trend Magic indicator to enter the trade.

When Trend Magic turns from Green to Red, the market will most likely move from Uptrend to Downtrend. What you need to do is wait for Sell entries at the places where the price retests the Trend Magic line. So the more the price falls, the more you enter SELL orders.

Profit-holding + stuffing SELL orders + average price decreases
Profit-holding + stuffing SELL orders + average price decreases

The exit point is when Trend Magic indicator turns from red to green. Put simply, you enter and close orders for the same reason.

Below is my real trading result with USOIL. I use the Profit-holding method and stuff 6 SELL orders in a row.

Real trading result with USOIL
Real trading result with USOIL

The pyramid pattern

Let’s try to imagine the pyramid of Egypt. Its bottom is large. But the higher it is, the smaller it gets.

It’s quite similar to the start and finish of a trend. When a trend begins, it’s very strong and hard to break. However, the further it goes, the weaker it gets. And at a specific point, it reverses to create a new one.

Thus, to earn profits safely, you should use more money at the beginning of a trend and use less when it goes further. Let’s apply this pattern to Profit-holding method.

For example, this is an uptrend of the gold price. When the market enters the uptrend, I will open a BUY order of 2 lots. The more the price goes up, the more I open BUY positions. But the volume will gradually decrease. Combined with Trailing Stop, I designed an extremely safe but effective way to manage capital when catching the market trend.

Managing capital according to the pyramid pattern
Managing capital according to the pyramid pattern

My trading experience when using the Profit-holding method

I have tried reading a lot of articles about profit-holding instructions, how to keep profits, how to hold positions on the Coin, Forex or stock market…

They only tell about the theory. First, identify the market trend. Then trust the trading system and patiently wait for good positions, practice on the demo account… None of them are practical indeed. Because, after reading and practicing, you can’t actually use them in real trading.

My experience shows that to make profits, besides the strategy you need to train the internal factors such as psychology (overcome the fear of losing money, accept failure…), discipline, patience.

Psychology

I list this factor first because it helps me reduce my fear of losing money on each trade.

My total income is $2,400 a month (average 80$ for 1 working day). My capital for Forex trading is $3,000. To create comfort and overcome fear, in each of my trades I am only allowed to lose a maximum of $60 (2% rule). My thinking now will be: “Well, if I lose $60, then that day my income is only $20. No big deal.”

The 2% rule in trading
The 2% rule in trading

It will be much more comfortable when you think like that. The fear of losing money will decrease. “If you’re right, you’ll make a lot of profits. If you’re wrong, you’ll lose $60. There’s nothing to be afraid of.”

After years of trading in this market, I discovered a fact. The more you’re afraid of losing money, the more money you lose. While those who have a comfortable mind and simple thinking earn more money daily.

So in the first step, do everything you can to reduce fear to the lowest level. Only then will you dare to stuff more orders when the market goes in line with your prediction.

Focus on the big picture of the market

The market is created by rising or falling waves one after another. The bigger the picture, the simpler the problem. BUY in an uptrend and SELL in a downtrend. Don’t focus on price movements in small time frames. You will get carried away by the market.

Focus on the big picture of the market
Focus on the big picture of the market

If you use the daily chart for analysis, you will have a larger view. Most importantly, you will gradually create a slow mindset in trading.

Think about it. When you’re slow, you learn patience. You start thinking with your reasons more than with your emotions. This is the foundation of Profit-holding method.

Reasonable partial close

When your orders are profitable as expected, close partially (1/2) to make sure that you have some profits. Then leave the rest there and raise the Stop Loss level to a reasonable level. This will reduce your fear of losing.

Partial close will make your mind more comfortable. You will gain more confidence to stuff more orders later.

Using Trailing Stop

I had a very detailed article on how to use Trailing Stop here. What is Trailing Stop? How to use it effectively in Forex trading.

Take your time to read it. I guarantee you it’s a valuable article.

Trailing Stop with SELL order
Trailing Stop with SELL order

Next, I will explain why you need to learn and practice this style of money management.

Why should you learn Profit-holding?

Avoid big loss

When your first order is right, there is a high chance that you have caught the right trend of the market. Use Profit-holding method and stuffing is the best way for you to have big profits.

On the contrary, when your first order is wrong, the price will hit Stop Loss and your account will only lose 1 small number (small loss). This is the advantage of profit-holding capital management method. Thanks to it, your account will hardly fall into the big loss condition.

Why should you learn Profit-holding?
Why should you learn Profit-holding?

Take advantage of market waves

An up or down wave in the market always lasts for a certain period. In each of those periods, you should only do 1 thing in each wave as I said above. It’s BUY in an up wave and SELL for the down wave.

Take advantage of market waves
Take advantage of market waves

If you’re confused with these two decisions in a big wave, it’s most likely that you will only lose and earn nothing.

When focusing on only one thing, you will take advantage of market factors to increase profits for your account.

Summary

What I share in this article may be simple but profit-holding and stuffing aren’t easy to use. This method is more of a psychology lesson than a trading skill lesson. Because to do that, you have to change the factors that come from within (emotions, psychology, discipline, patience, etc.).

Hope this article helps you trade and manage money better to earn more profits in Forex. Happy trading and see you again.

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Friday, October 15, 2021

What Is Trailing Stop? Unlimited Profit Taking With Automatic Stop Loss

Trailing Stop is very popular with experienced traders in Forex trading. They use Stop Loss to minimize the risk when their predictions are going wrong and Trailing Stop to increase profits as much as possible when they are right. This is the principle to survive and make money in this market.

So what is Trailing Stop? Why is it important to traders? How to use it in trading? All those questions will be answered in this article.

“When you are right, how much profits do you make? On the contrary, when you are wrong, how much do you lose?”

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What is Trailing Stop?

Trailing Stop (TS) is a type of stop loss that automatically moves according to price movements in the market. The stop loss will move gradually as the price goes in line with your prediction. But it will stand still when the price goes against what you predict.

You can understand it like this. When you use TS, there will not be a specific take profit (TP) level. The more the price moves in line with the trend, the more you change the Stop Loss level. Until the price changes direction, it will hit that Stop Loss level and your order will close on its own.

For example, you open a BUY order (Stop Loss: 30 pips). If the price increases, you will slowly change the Stop Loss level to the entry point (breakeven), then gradually increase it following the direction of the price. When the price drops and hits your Stop Loss, the BUY order will automatically close.

Trailing Stop example with BUY order
Trailing Stop example with BUY order

On the contrary, if you open a SELL trade (Stop loss: 20 pips). The lower the price, the more you move the Stop Loss level down. When the price bounces back and hits Stop Loss, the SELL order will close by itself.

Trailing Stop example with SELL order
Trailing Stop example with SELL order

Why do traders love to use Trailing Stop?

In Forex trading, a trader’s account status will fall into the following 5 cases:

(1) Big loss

(2) Small loss

(3) Breakeven

(4) Small win

(5) Big win

With a reasonable Stop loss level, your account will never fall into a big loss. Moreover, when using Trailing Stop, you have more chances to win big. It’s simply because the profit earned will be unlimited with just 1 order you predict correctly.

Why do traders use Trailing Stop?
Why do traders use Trailing Stop?

Assuming that you trade 10 orders and gain 3 losses (the price hits Stop loss), 3 draws, 2 small wins, and 2 big wins. In the end, you’re still the one making quite a lot of profits.

Trailing Stop techniques

There are many techniques for you to use Trailing Stop in Forex trading. But I will only divide them into 2 categories: (1) Active and (2) Automatic.

Active Trailing Stop

You move Stop Loss by yourself when the price moves in line with the trend you have predicted. I’ll give you some practical examples.

Use the Supertrend indicator

Supertrend indicator is quite popular among pro traders. You can go to the Tradingview indicator section to search more about it.

Use the Supertrend indicator
Use the Supertrend indicator

Supertrend is a trend trading indicator. It’s very suitable for Swing Traders, specializing in holding long-term orders. Trailing Stop will overlap with the Supertrend indicator line.

For example, you can see the SELL and BUY orders in the picture above. When the price reverses and touches the indicator, the orders will automatically close.

Use support and resistance levels

Moving the Stop Loss (Trailing Stop) below the support/resistance levels is also a good idea.

For example, in this BUY order, when the price creates a new support zone and goes up, we will change the Stop Loss right below these support zones. Only when the price reverses to break the nearest support, the order will hit Stop Loss and close.

Use support and resistance levels
Use support and resistance levels

Use the same method to enter and close an order

Let’s say you are using the EMA21 to look for entry points in the market. Then the principle here is closing the order with that same method you use to enter it.

For instance, when the price breaks out of the EMA21 from below, I will open a BUY order. The Stop loss is below the EMA21. After that, the price increases continuously, I will move the Stop loss (Trailing Stop) to follow the EMA21 line. And so on until the market reverses and the price cuts the EMA21 from above and hits Stop loss, the order will automatically close.

Use the same method to enter and close an order
Use the same method to enter and close an order

Automatic Trailing Stop

This is the special technique on the MT4 trading platform. You will set a fixed number of Trailing Stop levels for each trade. When the price fluctuates, your Stop loss will automatically follow.

For instance, you buy EUR/USD and want to set an automatic 20-pip Trailing Stop. It means if the price goes up 20 pips, your Stop Loss will automatically move up 20 pips. Conversely, if the price drops, the Stop Loss will stand still until the price touches it and the order will automatically close.

First, when the price has run in the right direction, go to MT4 on PC or Laptop (This feature can’t be used on smartphones). Right-click on the EUR/USD order (already profitable), select Trailing Stop, then select Custom.

How to set Automatic Trailing Stop on MT4
How to set Automatic Trailing Stop on MT4

At the level setting, you can enter the number of points you want. If you want to set a 20-pip TS, you will enter it as 200 points.

Set up TS on MT4
Set up TS on MT4

Note: If you use the Trailing Stop tool on MT4, your PC/laptop and MT4 software must be active continuously until the order closes to have this function work. If MT4 or your PC/laptop is shut down, slept, or disconnected from the internet, this tool won’t work until your MT4 is active again.

If you don’t still have something unclear or want to ask any questions, please leave a comment below. We’ll reply to you as soon as possible.

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Real Trading With Trend And Supply Demand Zones (Chapter 4)

Real Trading With Trend And Supply Demand Zones (Chapter 4) This is a whole chapter about real trading. I will talk more about money management and trading psychology. Moreover, I will also share my personal experiences when trading with the strategy: Trend + Supply Demand zones. Of course, since it is real trading, we will have a more meticulous way of entering orders. Please read chapters 1, 2, 3 that I wrote earlier for better understanding. Registe... Source from : https://howtotradeblog.com/real-trading-trend-supply-demand-zones/?feed_id=1310&_unique_id=61696509b03c6

What Are Supply and Demand Zones? The Idea Of This Strategy? (Chapter 1)

What Are Supply and Demand Zones? The Idea Of This Strategy? (Chapter 1) “Following the footsteps of Big Boys or big organizations in the market, you will make money.” This is the motto of those who prefer the school of trading according to the Supply and Demand zones. This is one of the best trading systems you need to know. Let's start from chapter 1 to chapter 4. I believe you will have useful knowledge after reading this series. Register an Exness account No... Source from : https://howtotradeblog.com/what-are-supply-and-demand-zones/?feed_id=1309&_unique_id=61696462e5756

How To Use Trend Trading With Supply And Demand zones (Chapter 3)

I write this article from my own experience after practicing trend trading with Supply and Demand zones for months. Hope you can gain more knowledge after trading this strategy. In this chapter, I will guide you on how to enter orders and the reason behind them. And the real trading orders will be in chapter 4.

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Conditions of the strategy

– I use the daily chart to analyze and predict the price because I'm not a day trader. I don't focus 100% of my time on making money in the markets. So I use the daily chart to slow things down. – Some of my favorite currency pairs are USD/JPY, EUR/USD, NZD/USD, GOLD (XAU/USD). Because everyone has their strengths, I'm only focusing on a few currency pairs that I understand well. If you’re in favor of the currency pairs above, EUR/JPY or GBP/JPY is also worth a try. [caption id="attachment_16587" align="aligncenter" width="1280"]Trading conditions for Trend and Supply Demand strategy Trading conditions for Trend and Supply Demand strategy[/caption] - I manage money according to the Risk/Reward ratio (R/R). There is a specific guide below to help you set up Stop Loss (SL) and Take Profit (TP). If you still don’t understand the uptrend and downtrend clearly, please read the two articles below. + What is an uptrend? How to trade Forex effectively in an uptrend. + What is a downtrend in Forex? How to trade Forex with a downtrend. – We will trade with 2 steps: + Step 1: Identify the main Trend and Supply and Demand zones created by the market. + Step 2: Wait for the price to retest the Supply or Demand zone and enter an order. In an uptrend, we’ll BUY. On the contrary, we’ll SELL in a downtrend.

Detailed guide on how to trade

BUY order

First, you need to identify the Uptrend and the Demand Zone. The theory goes like this. During the increasing process in an uptrend, the market will create demand zones. We will open BUY orders in these zones. [caption id="attachment_16588" align="aligncenter" width="1280"]How to enter BUY orders How to enter BUY orders[/caption] For detailed example with USD/JPY (from January 27, 2021 to February 17, 2021) The USD/JPY entered an uptrend period. Identified and drew the Demand zone on the chart (yellow area). My job was to wait for the price to come back and retest this zone and open a BUY order. [caption id="attachment_16589" align="aligncenter" width="1920"]Identify the Demand zone in the Uptrend Identify the Demand zone in the Uptrend[/caption] The price retested the Demand zone that I drew and created a trading signal with a Doji candlestick. + Opened a BUY order right away. + Set the SL below the Demand zone. + Set the TP at the previous top. [caption id="attachment_16590" align="aligncenter" width="1920"]Open a BUY trade Open a BUY trade[/caption] The price bounced back to the TP point. In this trade, I won 2R. [caption id="attachment_16591" align="aligncenter" width="1920"]A nice result with 2R profit A nice result with 2R profit[/caption]

SELL order

In theory, the price keeps falling and enters a Downtrend. Identify the Supply zones that the market has created. Wait for the signal to open the SELL order. [caption id="attachment_16592" align="alignnone" width="1280"]How to open SELL orders How to open SELL orders[/caption] For specific example with USD/JPY (from July 5, 2021 to August 5, 2021) USD/JPY was in a downtrend. This decreasing process created the Supply Zone (yellow area) on the chart. This was the main zone I waited for a SELL order. [caption id="attachment_16593" align="aligncenter" width="1920"]Identify the Supply zone in a downtrend Identify the Supply zone in a downtrend[/caption] The price moved back to the Supply zone and showed signs of reversal. + Entered a SELL order here. + Set the SL above the Supply zone. + Set the TP at the previous bottom. [caption id="attachment_16594" align="aligncenter" width="1920"]Enter a SELL order in the Supply zone Enter a SELL order in the Supply zone[/caption] Result: This SELL order has reached the TP with 2.5R. [caption id="attachment_16595" align="aligncenter" width="1920"]Sell order results with 2.5R profit Sell order results with 2.5R profit[/caption]

The lessons I draw after using Trend trading and Supply Demand

Trend is the most important

Remember that the main trend of the market is the first thing you should pay attention to. Then come to the Supply and Demand zones. If it is Uptrend, find the Demand zone. Conversely, in the downtrend, you focus on the Supply zone. [caption id="attachment_16596" align="aligncenter" width="1920"]Identifying the main trend of the market is the top priority Identifying the main trend of the market is the top priority[/caption]

Trading signals

Balanced candlesticks like Doji in the Supply Demand zone are good signals for you to consider opening an order. We will discuss this in detail on the next chapter. When the market has no good signal for you to BUY or SELL at the Supply and Demand zones, ignore it. Be patient to wait for a really nice one. Do not rush because you will always have another chance.

The signal when Supply and Demand zones could be broken

Be careful with the Engulfing candlestick pattern or the inverted Pin Bar candlesticks. When the above signals appear, you can consider closing the order. [caption id="attachment_16597" align="aligncenter" width="1280"]The signal when Supply and Demand zones could be broken The signal when Supply and Demand zones could be broken[/caption]

How long do the Supply and Demand zones become meaningless?

In theory with the daily chart, if the market does not return to the Supply or Demand zone within 1 month, that zone will become meaningless. But in reality and my opinion, we will have a plan to execute orders according to how the market reacts.

Swap between Supply and Demand

When the Supply zone is broken, it will change its role to the Demand zone and vice versa. This is quite similar to the support and resistance. [caption id="attachment_16598" align="aligncenter" width="1280"]Swap between Supply and Demand Swap between Supply and Demand[/caption]

Conclusion

So we have finished the Trend + Supply/Demand strategy. Please read it again and practice on the Tradingview basic account. Don’t worry. The basic account is completely free. I will continue to show how to trade Forex and Gold for real on MT4 in the next article. There will be a detailed analysis together with trading psychology too. Please wait for it.

How To Identify And Trade With Supply And Demand Zones (Chapter 2)

In this article, I will present 2 main topics. – Instructions on how to identify a Supply or Demand zone. – How to BUY/SELL, how to set Stop Loss, Take Profit with them in Forex trading. If you do not know what Supply and Demand zones are, you can read this article: What Are Supply and Demand Zones? The Idea Of This Strategy? Ok! Now let's go through each part so you can fully understand the strategy.

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How to identify the basic Supply and Demand zones

Identify the Supply zone

The Supply zone has 2 common patterns: (1) RP – Reversal and (2) CP – Continuation. (1) Reversal pattern (RP): Rally – Base – Drop [caption id="attachment_16529" align="aligncenter" width="1280"]Reversal Supply pattern Reversal Supply pattern[/caption] The price moves sideways after an uptrend and creates a sideways candlestick zone called the Base. Then it falls dramatically with a long body candlestick. This Base is the reversal Supply zone (RP). For example: [caption id="attachment_16530" align="aligncenter" width="1920"]An example of the reversal Supply pattern An example of the reversal Supply pattern[/caption] The 6 candlesticks moving sideways in the image above are the Base. When the gold price falls sharply and creates a red candlestick with a long body, this Base becomes the reversal Supply zone. (2) Continuation pattern (CP): Drop – Base – Drop [caption id="attachment_16531" align="aligncenter" width="1280"]Continuation Supply zone Continuation Supply zone[/caption] The price stops decreasing and creates sideways candlesticks. Then it continues to fall significantly. The sideways zone (Base) in this process will be the Supply zone. Detailed example: [caption id="attachment_16532" align="aligncenter" width="1920"]An example of the continuation Supply pattern An example of the continuation Supply pattern[/caption]

Identify the Demand zone

The Demand zone is similar to the Supply but we will focus on the strong bullish candlesticks. (1) Reversal Demand pattern (RP): Drop – Base - Rally [caption id="attachment_16533" align="aligncenter" width="1280"]Reversal Demand pattern Reversal Demand pattern[/caption] For example: [caption id="attachment_16534" align="aligncenter" width="1920"]An example of the reversal Demand pattern An example of the reversal Demand pattern[/caption] When the market bounces back, it creates a long green candlestick. Then the Base will be the Demand zone (RP). (2) Continuation Demand pattern (CP): Rally - Base - Rally [caption id="attachment_16535" align="aligncenter" width="1280"]Continuation Demand pattern Continuation Demand pattern[/caption] Detailed example: [caption id="attachment_16536" align="aligncenter" width="1920"]An example of the continuation Demand pattern An example of the continuation Demand pattern[/caption]

How to trade with the Supply and Demand zones

All we need to do is to watch for the strong bullish or bearish candlesticks. This is a sign of cash flow from large organizations. When the signal appears, it's time to look for entry points.

How to trade with the Supply zone

After identifying the Supply zone, the main job is to wait for SELL opportunities. When the price returns to retest the Supply zone, find an appropriate entry point and place a SELL order. For example, the yellow zone is the Supply zone of gold (XAU/USD). (1) When the price returns to this zone and creates a small body candlestick, this could be a signal that it will stop increasing. [caption id="attachment_16537" align="aligncenter" width="1280"]Trading with the Supply zone Trading with the Supply zone[/caption] (2) Place 1 SELL order (Risk/Reward = 1:2) + Set the stop loss a few pips above the Supply zone to avoid being swept by the market. + Set the take profit to overlap the below Demand zone. Result: The price drops sharply and touches TP. [caption id="attachment_16538" align="aligncenter" width="1920"]Trading result with the Supply zone Trading result with the Supply zone[/caption] I have another example about the gold price. (1) The price increases and enters the Supply zone. Then it begins to show a slow increase signal with a small green candlestick. [caption id="attachment_16539" align="aligncenter" width="1280"]Sell Gold at the Supply zone Sell Gold at the Supply zone[/caption] (2) Place 1 SELL order (Risk/Reward = 1:3) + Set the stop loss a few pips above the Supply zone. + Set the take profit to overlap the below Demand zone (as the picture shown). Result: The price falls sharply and hits TP. [caption id="attachment_16540" align="aligncenter" width="1920"]Trading result with the Sell order Trading result with the Sell order[/caption]

How to trade with the Demand zone

The first thing to do is to identify the Demand zone. The next is to wait for the BUY signal. When the price retests the Demand zone and creates a bullish reversal signal => Place a BUY order. We have an example of the Gold BUY order (XAU/USD). The price falls back to the Demand zone and creates a reversal signal. [caption id="attachment_16541" align="aligncenter" width="1920"]How to trade with the Demand zone How to trade with the Demand zone[/caption] Place the BUY order: + Set Stop Loss below the Demand zone. + Set Take Profit in 2 Supply zones. As a result, the price increases and hits both TP1 and TP2. [caption id="attachment_16542" align="aligncenter" width="1920"]Result of the BUY order Result of the BUY order[/caption] It is already quite long so I'll save the real trading experiences for the next article. We’ll also learn the reason why you should use a daily chart and when the Supply and Demand zones are no longer make sense.

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Wednesday, October 13, 2021

How To Use Risk/Reward Ratio Effectively In Forex Trading

When I begin to learn about Forex, many experienced traders told me that Risk/Reward (R/R) ratio is one of the best ways to manage money in trading. At first, I didn’t believe what they say and used other methods to get rich more quickly. Despite having a win rate from 60-70%, I kept losing money and burned a lot of accounts.

After one year, I decided to change my mind and tried to use the Risk/Reward ratio. And it turned out what they said was true. This method helped me a lot to keep my money safe and make profits gradually. Instead of getting rich-quick, I’m doing it slowly and safely now.

In this article, I will share all my experiences about how to manage money (capital) according to the R/R ratio. What is the reasonable rate of 1R? How to improve R/R ratio? Or why are its difficulty?

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What is the Risk/Reward ratio?

Risk/Reward Ratio (also known as R/R ratio) is simply understood as the ratio of the money you’re willing to lose in exchange of the profits you want to earn in 1 trade.

For example, I open a BUY EUR/USD order with 40 pips stop loss and 120 pips take profit . So in this case the ratio R/R = 1:3. Or in other words, in this trade, if I’m wrong, I will lose 1R. But if I’m right, I will win 3R.

What is the Risk/Reward ratio?
What is the Risk/Reward ratio?

Usually, to determine how much money 1R is, people will base on the total money in your trading account (account balance).

For example, your account balance is $1,000. You choose 1R = 2% of the capital. So if you are wrong, you lose 1R = $20. Conversely, you will gain $60$ when winning.

Or you can change 1R = 5%, with R/R = 1:4 for 1 trade => If your prediction is wrong, you will lose $50. And when you win, you will earn $250.

In practice, professional traders often choose 1R = 2%. Why is 1R = 2%? You can check the 2% rule article to know the reason.

Some ways to use the R/R ratio in practice

Traders who use R/R ratio to manage money usually have a table summarizing their transactions (trading log). If they lose a trade, they will record -1R. On the contrary, if win, they will record +2R, +1.5R… depending on the amount earned.

Trading log with the Risk/Reward ratio
Trading log with the Risk/Reward ratio

And in the end, what it all boils down to is making as much R profit as possible. Now I will share some ways to use the R/R ratio effectively.

Prioritize orders with a high R/R ratio potential

In a word, to start the trading day, I browse through certain currency pairs, analyze and predict their price trends. Then, I find the entry points, stop loss and take profit. From there, I will have an overview of the R/R ratio of these pairs. The ones with a low R/R ratio will be ignored. Those with high R/R ratios will be prioritized for monitoring and trading.

Prioritize orders with a high R/R ratio potential
Prioritize orders with a high R/R ratio potential

Take for example the image above. The EUR/JPY order will be prioritized to trade because its ratio = 1:4 (best compared to the others).

Usually, long term traders will prefer this approach. What they need to do every day is quite simple. Take a little time, look at the overall market for each currency pair, pick a few pairs with a high R/R ratio and focus on them. When all the conditions have been met, they will enter the order.

Only trade with a certain R/R ratio

Simply put, you will choose a certain R/R ratio such as 1:2, 1:3 or 1:4 or even higher.

Trade with a certain R/R ratio
Trade with a certain R/R ratio

I give an example of a trader who loves the Risk/Reward ratio = 1:2. If the expected profit is not enough 2R, then he will pass. On the contrary, if any currency pair gives a chance to trade at a ratio of 1:2 or higher, he will consider opening a trade.

Often this approach will work for Day Traders, who spend most of their time looking for trading opportunities in the market.

What Risk/Reward ratio is reasonable?

Answer: The win rate will determine the R/R ratio.

For instance, your Forex trading method has a win rate = 50% (trade 100 orders, 50 wins – 50 losses). So you only need 1 ratio = 1:2 to make profits (50 x 2R – 50 x 1R = 50R).

On the other hand, if the win rate is only 30% (trade 100 orders, 30 win – 70 lose). So for the account to be profitable, the ratio must be 1:2.5 or more => (30 x 2.5R – 70 x 1R = 5R). 5R for 100 orders is too small.

What ratio is reasonable?
What ratio is reasonable?

In reality, many traders make money with a win rate of about 30%. But every time they win, they make a lot of Rs in profit. After all, they’re still profitable.

Remember that our goal is to make as much R profit as possible. Therefore, calculate the winning rate carefully to be able to give a reasonable R/R ratio.

How to improve the R/R ratio?

Patience and patience

Optimizing Stop Loss is the best way to increase the R/R ratio. I will give you two specific scenarios.

Scenario A: Price breaks out of the resistance and goes up. If you enter a BUY order right now, your stop loss level will be 80 pips => If the price goes up 160 pips, the ratio is 1:2.

How to improve the R:R ratio?
How to improve the R:R ratio?

Scenario B: You wait patiently for the price to retest the resistance zone and enter a BUY order. At this point, your SL is only 60 pips => If the price goes up 160 pips, then the ratio is now 1:2.6.

Do you understand what I mean? The more patiently you “bargain” with the market for a better position, the better the R/R ratio will be.

Long-term perspective change

Assuming you analyze the market in a small time frame (15 minutes or 1 hour), you will see a short take profit point.

Change to trade with long time frames
Change to trade with long time frames

Try changing the timeframe on the chart you analyze (4 hours or days). You will see bigger waves, longer Uptrend or Downtrend cycles. From there, your take profit point will also be much longer. This will help improve your R/R ratio.

Evaluate the Risk/Reward ratio

The two key points that traders always find difficult when using this ratio are psychology and discipline. Let’s take a look at some of the pros and cons of this way of managing capital.

Account status

Similar to the 2% rule, the advantage of the R/R ratio is that your account status will never fall into a case of big loss. Your money will still be there, and opportunities will always come for those with money.

Account status when managing money with the Risk/Reward ratio
Account status when managing money with the Risk/Reward ratio

In this market, what you need to do is survive and adapt. If you can survive after a long time and still do not lose all money, you will earn profits naturally.

Profit taking psychology

All I write above is basically talking on paper. To use the Risk/Reward ratio effectively, you have to experience and go through hundreds of big and small battles in the market.

In the beginning, if you just simulate this way of managing capital and expect the same results, it’s not that easy. It’s because everyone’s mentality is different.

You may know it is normal for the price to go against the prediction and your order hits stop loss. But on the contrary, assuming the price goes in the right direction, the feeling of waiting for take profit is really terrible. It’s like you’re afraid a robber is staring at your pocket. At this point, you might make the wrong decisions.

Profit taking psychology example
Profit taking psychology example

For instance, the above is a beautiful BUY EUR/USD order with an expected R/R ratio of 1:2. The price has only increased half of the way, then the trader begins to feel afraid. He closes the order when the price has not reached the take profit level. From 1 trading order with the ratio = 1:2, it is now just 1:0.8

The psychology of waiting for TP is one of the barriers of capital management with the R/R ratio. When you are wrong, you lose 1R. But when you are right, psychology makes you not earn enough 1R. If you can’t solve this problem, your balance will lose gradually until it reaches 0.

Discipline is the most important part of Risk/Reward ratio

All traders who use the R/R ratio know its rules. “1R = 2% of the account and each trade is not allowed to lose more than 1R”. Or “Don’t trade when R/R ratio is lower than 1:2”. There are many other sayings. But not many people can obey the rules strictly.

Plenty of them get caught up in the market, forget what they learn and throw away the rules. And in the end, they leave the market with empty hands.

Remember that R/R ratio is good but it’s nothing without discipline.

Conclusion

Risk/Reward ratio is another great way to manage your capital to survive and make profits in the market. Personally, I also see a lot of traders choosing it as a guideline in their risk management strategies.

To actually master the R/R ratio is a long process. What you have to deal with are patience and discipline. It’s not as easy as you are reading my article.

Let’s experience it in a Demo account. I have already shared all things I learn and experience in this article. Goodbye and see you again in the next ones.

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