CHAPTER 5 - LESSON 1
Forex trading involves a high degree of risk, and traders must be aware of those risks and take steps to manage their exposure. Understanding the relationship between risk and reward is key.
Below are some key things to know about risk and reward in forex trading:
Refers to the potential loss that a trader can incur on a trade. Traders should always consider the risk of a trade before entering it, and should use stop loss orders to limit their potential losses.
Refers to the potential profit that a trader can earn on a trade. Traders should consider the potential reward of a trade before entering it, and aim for a reward that is greater than the risk they are taking on the trade.
The ratio of the potential reward of a trade to the potential risk. Traders should aim for a risk-reward ratio of at least 1:2, meaning that the potential reward is at least twice the potential risk.
The likelihood that a trade will be profitable. Traders should consider the probability of success when entering a trade, and should only enter trades that have a high probability of success.
Traders should always aim to maximize their potential rewards while minimizing their potential risks. This can be done by using risk management strategies such as stop loss orders, and by avoiding trades that have a low probability of success.
To sum up, traders should consider the potential risks and rewards of a trade before entering it, and should aim for a risk-reward ratio of at least 1:2. Traders should also consider the probability of success when entering a trade, and should use strategies to limit their potential losses.
In the next section, we will talk about some key risk management strategies used in trading the forex market.
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Risk Warning: Margin trading involves a high level of risk, and may not be suitable for all investors. You should carefully consider your objectives, financial situation, needs and level of experience before entering into any margined transactions with Baxia Markets, and seek independent advice if necessary. Forex and CFDs are highly leveraged products which mean both gains and losses are magnified. You should only trade in these products if you fully understand the risks involved and can afford losses without adversely affecting your lifestyle (including the risk of losing the entirety of your initial investment). You must assess and consider them carefully before making any decision about using our products or services.
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