what’s the best way to grow your trading account

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Most novice traders think that to constantly make money  in the market you must have a trading strategy that produces winning trades all the time but that isn’t true.

In fact, most professional traders make money on only 30-40% of their trade. Most traders have more losing trades. That’s a fact!

I also have more losing trades than wins.

To put this in perspective. Out of 10 trades I place , 6 of them are losses , only 4 wins…however my trading account keeps on growing. How is that possible? Well, you are about to find out!

Here, i want to show you something that most novice traders are not aware of. Something called risk/reward ratio.

WHAT IS RISK/REWARD  RATIO?

Risk/reward ratio is about how much you risk per trade  versus how much you can make in profit if you are right.

For example, if you risk $200 to make $800 then your risk:reward ratio would be 1:4. You risk $200 to make 800 return.

Let’s assume you have $10,000 account and you decide to risk only 2% per trade you take, meaning you risk $200 per trade.

For the sake of this example,Let’s say you have a risk/reward ratio of 1:4 (for every dollar you risk, you stand a chance to make $4) but your winning rate is 40%.

So, out of 10 trades, you have 6 losing trades and 4 winners..

Let’s do the maths and see how much you will make/lose after 10 trades…

  • You place your 1st trade  and it goes again you, you lose $200.
  • 2nd trade, It hit your stop loss and you’re out with another loss of $200 loss 
  • 3rd trade, it goes as anticipated and you make $800 profit.
  • 4th trade, .another  Lose of $200.
  • 5th trade, you make a profit  $800
  • 6th trade makes you another profit of $800
  • You now place you 7th trade, you lose $200
  • 8th trade, lose  $200
  • 9. Lose again $200
  • 10th trade, you Make $800

 

You took 10 trades: 6 were losing trades and 4 were  winning trades.

This means your percentage win ratio is 4/10 or 40%.

Now, let’s look at how much you are left with in your terminal:

Total Loss = $200×6 = $1,200

Total Gain = $800×4 = $3,300

Net gain = $3 200 -$ 1 200 = $ 2000

In this example, you can see that even if you only won 40% of your trades, you would still make a profit of $2,000. Just remember that whenever you trade with a good risk/reward ratio, your chances of being profitable are much greater even if you have a lower win percentage.

Now, imagine how much you could make in a long run as your account keeps on growing. Let’s say after few months you are able to double your account to $20, 000 and decide to risk 2% of $20 000 meaning you now risking $400 per trade. few years down the line you will be making a killing.

In this example, you can see that even if you only won 40% of your trades, you would still make money.this proves that you don’t really need to to be right most of the time to make money.

Risk reward ration is a very good approach. A trader can be wrong 10 times in a row and cover all the losses in 1 or two trades.

 

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It’s not whether you’re right or wrong that is important, but how much you make when you’re right and how much you lose when you’re wrong -George soros

I’ve included one live example (before and after) of a short trade  I took few months ago on NZD/JPY before I wrote this post to show you the beauty of risk:reward ratio

risk reward ratio - nzdjpy before

I was anticipating a down  move from 83.685 to 73.904 meaning I was expecting to make +900 pips should the price go my way.

Let’s see what happened after…

risk reward ratio -nzdjpy after

As you can see, the price went as i expected. however, I was stopped out with only +610 pips.

Here is the interesting thing though about this position:

when I entered this trade I placed a 30 pips stop loss so this means I risked 30 pips to make 600 pips meaning my risk:reward ratio was 1:20.3

-this is possible if you’re disciplined enough to use position sizing all the time and  Learn to let your winners run and cut your losses short.

By now I hope you understand the risk/reward ratio


 

 

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4 thoughts on “what’s the best way to grow your trading account”

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