Today's post is about a concept that appears to be self-evident; how to calculate trading gains. Most traders, however, start out misdiagnosing their profit (and loss) completely. It isn't their fault that they do it because of conventional thinking and what is commonly shared on the internet or advised by brokers and even books.
Hence, I'd want to offer you a practical example of how to assess your trading performance and risk in the market, which is probably not what you've read or heard elsewhere. Overall, our goal is to make money from our trades, isn't it? Every trader who is start trading in forex will be agreed with me on this question.
As you may recall if you've been reading my blog for a while, I primarily trade in the swing market and that is the style of trading we cover here.
Let's be fair and upfront before we get into how I assess risk and reward while trading the markets, so let's have a discussion about the three main methods traders use to measure it. We'll go through each one, then talk about which one professional trader prioritized and why.
Three profit measuring rules in forex:
The 2% Method - A trader sets aside a specific amount of money (usually 2 or 3%) on each trade, regardless of how the trade performs. The basic idea is that as a trader win, his or her position size will gradually rise in line with the size of the account.
However, the typical thing is that a trader loses his/her trading capital for various reasons, read this full article to learn about why traders are failing in trading, and then they are trapped trading smaller and smaller position sizes due to the 2% rule (which limits you to losing only two percent of your money; see here for how it works).
Traders focus on how many pips or points they gain or lose in each trade. Here we will not focus on this method because we are trading in to make money, not pips or points. So, it is silly to think that focusing on the pips will help you make more money.
A trader who uses this strategy is said to risk a fixed amount of money on each trade until they decide to change it. When a trader risking per trade is called "R" where "R"= risk. The reward is calculated in multiples of Risk, so a 2R reward is equivalent to a 2R challenge, for example.