Most forex traders want to make a profit trading.
But most traders don’t.
Unprofitable forex traders think about how much money they’re going to make trading. That’s unlike professional traders.
Professional forex traders think about risk-reward…and focus on risk.
Let us explain…
How to make a profit trading forex: The basics of risk–reward
To start, imagine you see a forex trade that could make 40 pips.
You decide it’s worth a punt and set your maximum loss at 20 pips.
So the risk-reward ratio is 1:2. You can earn twice the amount you risk losing.
Hold your horses!
Let us ask you a question: What’s the best risk-reward ratio?
If you don’t know, you’re not alone…
Some forex traders won’t trade unless the risk-reward is 1:3. Others will still trade if the risk-reward is 1:1.
It depends on your level of confidence.
If you’re always trading one set-up (i.e. ascending triangle), and see the same pattern often, you might have a higher risk-reward. That’s because you have more confidence in the trade.
At the end of the day, you must win more than you lose to be a consistently profitable trader.
That’s profit trading 101.
How to make a profit trading forex: Digging deeper
Having said that, risk-reward is never constant.
Most traders never consider that risk changes.
Risk changes all the time.
Forex prices are constantly changing.
If you enter a trade with a risk-reward of 1:3, that might change in the trade. Professional forex traders who are consistently profitable know this fact.
Indeed, you should always be thinking about if the trade makes sense...and not just before the trade. If the risk has changed in the trade, sell.
Remember, your risk-reward is constantly changing with the market.
Most traders forget that risk changes.
Pro traders don’t and that’s what makes them pro traders.
As a professional forex trader, you have to focus on risk at all times...not profit. That’s how you can make profit trading consistently in the markets. If the story or trade set-up changes for the worst, sell straightaway.
Spreads and commissions
Talking about risk-reward, most new forex traders factor in trading costs when calculating risk-reward.
Don’t do this…
Don’t include trading costs in your risk-reward calculation.
Forex spreads and commissions are the cost of doing business.
Forex costs shouldn’t affect your risk-reward calculation that much as well. They are small.
The risk-reward should be a standalone measure.
Ask yourself: Does the forex trade stack up?
If the risk-reward for the potential trade is positive, you should open a position. If that fact changes during the trade, sell. That’s how you make profit trading consistently in forex. You need discipline and to be cold-blooded. This is trading and you should treat it like your business – not a hobby.
How to make a profit trading forex: Trading strategies
There are lots of forex strategies you can use to make a profit trading.
Remember, your risk-reward depends on your strategy…
Let’s say you’re a scalper.
You should have a lower risk-reward ratio to keep your losses tight. If you get greedy and have bigger stop losses, you won’t stand a chance of making profit trading in the markets. Successful scalpers tend to have their stop losses as virtually breakeven. This means, if the trade goes against them straightaway, they ‘scratch’ the trade and sell for virtually no loss.
Don’t be greedy.
Small gains add up and time is of the essence.
If you’re a position or momentum trader, you can afford to have a higher risk-reward ratio. You have time for the forex trade to play out and can take on more risk.
Note: Not all major forex pairs are suited to all strategies. You should match suitable forex pairs to your trading strategy. But, as discussed in what are the the best forex pairs to trade, you should choose a few major forex pairs to trade at the start.
The quick and dirty
Pop quiz time: Do you know the most common mistakes of forex traders now?
Most forex traders think they need to win every trade. That’s why most forex traders are just focused on making profit trading. That said, most forex traders have an ego problem and don’t want to lose any money…
If you get into this game, expect to lose money.
Remember, elite forex traders win 50% of the time at best!
Let that sink in…
You don’t need to hit the ball out of the park on every forex trade. You just need a positive risk-reward ratio on most trades.
Think in terms of win rate…
How to make a profit trading forex: Win rate
Win rate is similar to risk-reward.
Imagine you have a risk-reward of 1:1 and win 60% of the time. That means you’re profitable.
If your risk–reward falls below one, you will still be profitable. That’s because you win 60% of the time and your risk-reward ratio is still positive.
A win rate of 50% or below means your winners have to be more than your losers. The more you win than lose, the more profitable you are at trading forex. That’s common sense stuff.
You don’t need to have a high risk-reward ratio to make profit trading forex.
You just need to win more than you lose.
Small gains add up.
And big losses add up too!
Forex trading is a game of odds, just like poker, as we explained in forex traders secrets.
If your wins are lower than your losses, the big wins don’t matter overall. That’s why it’s necessary to keep your losses small. In an ideal world, we would have the largest risk-reward and highest win rate. But if you win more than you lose, this mix isn’t essential to become a consistently profitable forex trader.
Your ‘Start With Forex’ Takeaway: How to make a profit trading forex
Risk-reward is an essential part of your success in the forex game.
If you remember anything about risk-reward, let it be this: You don’t have to hit the ball out of the park with every single trade to make profit trading forex.
You just need to win more than you lose.
That’s the hard part.
Most forex traders don’t focus on risk. The best forex trades focus on risk at all times.
Be different and think like a professional forex trader…
Your ‘Start With Forex’ Takeaway: Consistently profitable forex traders think about risk first and reward second. Remember, elite traders know that risk isn’t constant ― it’s always changing. If you keep your losses small and win more than you lose, you will end up being a consistently profitable forex trader over the long run.
I hope you’re learning lots from this course. But there’s still so much for you to discover. In the next couple of lessons, we’ll cover some more forex basics. These are going to be shorter but essential lessons. If you’re ready to learn about why the forex rollover is important, click here.
To your trading success,
Start With Forex
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