Risk is one of the main key of success in the world of trading. Every trade bears a certain level of risk. Knowing the quantity of risk on your any kind of trade is one of the best way to limit it and to protect your extra loss. It is not possible to determine probably the certain amount of risk level in any kind of trading. But in the huge amount of up-down market of forex trading it is really needed to measure the risk level.
In forex trading, the best way to know your risk is to determine the risk-reward ratio. Measurement of forex risk reward ratio is one of the first steps you must know before joining into the forex trading. It is one of the most effective risk management tools used in trading.
How to Determine the Risk-Reward Ratio?
This ratio is calculated by dividing the amount of income the trader guess to have made when the position is closed by the amount he stands to drop if price moves in the unexpected direction.
To determine the amount of risk you need to determine the amount of money needed to enter the trade. And trader is hopeful to earn from the currency price is the reward level of that the movement. Here are a few examples of the risk-reward ratio:
If the risk is $400 and the reward is $800, then the risk-reward ratio is 400:800 or 1:2
If the risk is $1,200 and the reward is $600, then the risk-reward ratio is 1200:600 or 2:1
It is general concept for risk-reward ratio; you will get lots tools in the web for determining risk-reward ratio in more details with lots of effective features.
