The amount of money that one makes through forex trading totally depends on the volume and nature of trade that the trader carries out. You would have read stories of people who have earned millions and billions through forex trade. But you can never compare two traders and their profits. Because, the invested amount, trade strategies, and techniques differ for every trader.
As forex trading takes place 24 hours a day, a trader has the potential to make significant profits through the leverage offered by the forex broker. Though the forex market is volatile, smart trading strategies and risk management techniques can help a trader win trades and make profitable returns. A successful trader with effective trade techniques can earn more than 20% of returns every month. The win rate of the trader should be more than 55% at least. So, what is the win rate?
To determine your profits in the long term, you need to calculate your win rate and risk to reward ratio.
What is the risk to reward ratio?
The risk to reward ratio is used to manage potential risks in a trade. By knowing the risk to reward ratio, the trader can prevent potential losses. Example: If the risk to reward ratio is 1:5, the trader is willing to risk 1% to earn 5%. This ratio helps the traders predict how much returns they can expect and know the risks they are going to dive into. The risks and rewards can be managed efficiently by stop-loss orders, put options, etc. The risk to reward ratio will vary for different types of trades and trade strategies. A trader should use unique methods to calculate the risk to reward ratio for different trades.
What does win rate mean?
The win rate is simple. It is the ratio of the number of trades that a trader has won and the number of trades he has lost. The healthy win rate is considered to be over 50%. Anything less than that means the trader has a high probability to face losses. The win rate is also called the success ratio. It denotes how successful a trader is. You can expect favorable outcomes in a trade if your win rate is more than 50%.
Minimize risks for profitable returns
A trader should keep his risks below 1% in each trade to make good profits. If the risk factor is high with every trade, then the chances for losses will be high. Example: Let’s say you have $5000 in your trade account. You shouldn’t lose more than $50 in a trade. Even when your trade day is good, and you manage to implement profitable trade techniques, you may still have unexpected losses as per the price fluctuations in currency values. Therefore, try to keep the risks as low as possible. Practice risk management techniques such as stop-loss order.
Leverage in forex trading
Leverage is a popular concept in forex trading to make large profits using the minimum money available. Traders can borrow capital to invest in currencies of large value. This can help them secure large trade positions in the forex market. In return, they can earn high profits and pay off the borrowed money.
The concept may sound attractive, but you must know leverage can also backfire if the trade ends up in a loss. If you lose the trade, your losses will be huge and you will end up in a debt. A trader has to follow smart trade techniques and risk management strategies while indulging in leverage to win the trades.
The leverage will vary from broker to broker. Before selecting a forex broker, you can enquire about the leverage he offers. Some brokers provide leverage up to 50 to 1, while some provide 30 to 1. This can differ with each broker.
If you are a trader, and you have $3000 with you for a trade, and the broker offers leverage up to 30 to 1, you can take positions that are worth about $130,000 in the forex market. If your trade strategy is good, you can win this trade and gain great profits. Your risks in this trade will be based on your owned amount of $3000. You have to make sure you keep the risks low. The risks should be limited to the tiny portion of your deposited amount.
Most forex brokers increase the spread to gain profits. In return, they will not charge commissions. Some brokers charge commissions and keep the spread low. Usually, the forex brokers will keep the leverage less for beginners and newbies, as they do not have enough experience in trading. Traders can plan the leverage based on the volume of trade they are going to indulge in.
To conclude, the forex market is a potential place to make good profits. But this doesn’t eliminate the risk factor. A trader can make profits only when the trade strategies, and risk management techniques are appropriate to the market scenario.