Position sizing using the risk reward ratio
by John Arnold
Forex trading is all about the right decision at the right time. It is imperative to take objective decisions using forex trading instruments for guidance. What positions to take and when to take is where experience and platforms like MT4 play a role. Position sizing is an important aspect of money management strategies.
Most of the seasoned trader’s assess the risk reward ratio of a particular trade on a routine basis. This gives them an insight towards completing the trade and helps in decision making. In most cases the risk reward ratio has become an integral part of the trading plan. Risk reward ratio can also be applied to position sizing.
Risk reward ratio is basically quantifying the anticipated amount of risk on a trade against that particular trade’s projected quantified returns. This definition can be simplified to state that one must calculate the number of pips from the time of entry till stop loss and then again calculate the pip from the time of entry to it’s projected return. Comparing both is the risk reward ratio.
If the ratio is 1:2; it would mean one could risk 1 pip to earn projected 2 pips. Seasoned traders would be in the trade only if the risk is less than half that of the projected value.
Position sizing using risk reward ratio should be based on information and analysis gained from forex trading instruments and from free downloadable trading platforms like MT4.
Researching the potential risks that can happen is as essential as researching for projected figure. Position sizing should be based on this. Once the research is thorough, it is possible to estimate the projected losses and rewards. Then weigh the both together. The probability of either should be clearly understood. Position sizing can then be guided through stop losses to ensure that the end result is what is expected if not in total at least partial. This is a learning curve and each trade is a teacher.
The utilization of the forex instruments is one of the most important lessons that can be learnt in the forex trading experience. The ability to foresee and project returns with the ability to reduce the risks of losses will lead the path towards being a successful forex trader . MT4 free downloaded platform help in easing this analysis and also helps in giving all the inputs required towards making the right decisions and creating the right position sizing for the trader.
A successful trader always knows the risk reward of the trade at a particular position and also what percentage of the account is at risk during that particular trade. Usually no more than 2% of risk is allowed for a particular trade. High probability can give high profits. While the size of positions in relation to the size of the account can give insight to the risk involved.
A wise trader would build the account slowly and then increase the trading size and positions gradually using good money management practices like risk reward ratio to decide on position sizing and projected rewards. Be wise; be careful while you continue the journey in the world of forex trading!
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