Balancing the Risk and Rewards in Forex Trading for a Profitable Business
Forex can be very interesting and profitable if you have the right tactics to do it. However, this type of trading has a huge amount of risk too if the right strategies are not used at the right time. The potential of earning high rewards in forex trading comes through only your confidence, skills and experience. This article talks about concept of risk, profit and tips of trading.
Understanding the Concept of Risk
Basically, three factors contribute to the risk in forex trading. They include leverage used in trades, trade volume and the stops.
Leverage Used in Trade
Since the forex movements are very small and you need to boost them through large trade volumes, forex trading can be termed as a leveraged activity. The leverage is nothing but a means of acquiring extra capital by the traders. This concept started when the traders were not able to afford the huge amounts of sum, which was required to produce trade volumes to boost the pip movements. Nonetheless, another fact is that leverage can be fatal too. While boosting up your profits, it can magnify your losses too. You must know that these degrees of profits and losses are not in the proportion of your margin but it is in the full measure of the amount of the trade capital including the used leverage.
Stop Used in Trade Protection
The stop loss is measured in pips. As a trader, it is significant for you to know that the height of risk posed by the stop loss is equal to the trade volume and the number of pips. Yes, the amount of pips used to set the stop loss and lot size used in the trade is equivalent to degree of risk of stop loss. For instance, if you have set the stop loss of around 100 pips and the lot size of 0.1 lots then the risk to your trade is of $100.
Trade volume or the lot size is the last element of risk in forex trading, which you must be aware of. You must know that it direct affects the monetary value of pip and leverage in trading.
The Concept of Reward
The reward in forex trading is also generated by three factors, which are discussed as under:
The Take Profit Settings
It is true that forex produces a variable return just like an investment vehicle. It can be said that the degree of returns witnessed in this type of trading directly results from the volume of pips used to move the trade. You must always plan to setup the forex trade in a way in which most of the pips can be achieved.
The Lot Size
It has direct effect on the monetary value of the reward. For instance, if you have put 1 standard lot size in setting up a trade then you can expect to make a profit of $10 per pip movement.
Leverage will have a direct effect on the trading activity. However, you must be careful in using leverage.
In order to use the risk and reward effectively, you must aim to achieve trade with the delivery of at least 3 pips in potential reward for each 1 pip that you have risked as stop loss. In addition to this, you must plan to choose trades with high rewards and less risk. It is because if you have set up your trade in which the risks are more than the rewards then you will only end up with losses. It will not bring any profit to your business, as mammoth losses will compensate the profits that you have made. Thus, be wise and act smart while trading in forex.