What is your main difficulty in forex trading?
Your main difficulty can be any one of a thousand possible answers, but if you are a trader, what is important to you is merely whether you have taken the correct trade in the right direction, and how much you will make or gain.
Why is this important?
This is important because you can be taking a wrong trading move, but if you respond fast enough and get back to the correct direction of the trade, you can still be profitable.
Indeed, we are more concerned about how profitable we are as forex traders, and not how accurate or how correct we are. As our main objective is to be profitable, we should look at how incorrect we are, rather than how accurate or correct we are, as it is the incorrectness of the move that will lead us to lower profitability and sometimes losses.
To give an analogy, as a professional civil engineer in charge of water dam designs, I would be more concerned about how inaccurate my designs are. I can be 95% accurate, but my inaccurateness of just 5 % can be fatal to the dam design, and if this inaccuracy causes the dam to fail, there can be a sudden release of water to deluge and flood the city that lies just below the dam where thousands of lives can be lost and billions of dollars wiped off.
Therefore, when we take any forex trade, we must measure the trade to the profitability measure of the trade. In this case, we look at the Risk to Reward ratio which measures the profitability of the trading setup.
How much risk to the reward are we going to accept to allow us to take any forex trade? This will, of course, be different for each currency pair that we trade. Before we embark on trading any currency pair, it will do us good to know how much risk we are going to tolerate and decide on the acceptability of the risk to reward ratio for that trade.
Together with the individual risk to reward ratio for the individual pattern we have sighted, we can also have an overall look from the aspect of the number of wins to the number of losses when checked or back tested for that particular chart pattern.
Once we see a consistently high win to loss ratio for that chart pattern, we can gain a level of confidence that the stock pattern can perform. Coupled with a good risk to reward ratio for that individual trade, we can proceed to trade any currency pair with confidence and to extract the maximum gains out of any trade.
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