3. Calculate risk / reward ratio before entering a trade
When chances to win in a trade are smaller than potential losses, don't trade! Remember — staying aside is a position.
For example: 40 pips to lose versus 30 pips to win, 20 pips to lose versus 20 pips to win — all that is a clear sign of bad risk management.
Before entering each trade, reassure that risk / reward ratio is at least 1:3, which means that chances to lose are tree times less than promises to win. For example: 30 pips of possible loss versus 100 pips of potential win is a good trade to consider entering.
Adopting this money management rule as a must, in the long run will dramatically increase trader's chances to succeed in making stable gains.
Next chart shows the "risk / reward" rule in practice.
Ten trades based on 1:3 risk / reward ratio were conducted. A trader was losing only $ 100 in each trade when he was wrong, but won $ 300 in each profitable trade.
| Trades | Losing trades | Winning trades |
| 1 | +300 | |
| 2 | -100 | |
| 3 | -100 | |
| 4 | +300 | |
| 5 | +300 | |
| 6 | -100 | |
| 7 | +300 | |
| 8 | +300 | |
| 9 | -100 | |
| 10 | -100 | |
| Total | - $500 | + $1500 |
| Grand Total | + $1000 in profit | |
As we can see, constantly using 1:3 risk / reward ratio and being successful only 50% of the time, trader will still make a profit. The higher the reward ratio (compared to risk ratio) the better are chances to end up in profit.
4. Learn to use protective stopsAbout protective stops and their importance for good money management continue reading: Learn to use Stop Loss effectively
