The first deals with how much you expect to get back for the potential loss that you may realize. In other words, I reasonably expect that the trade could go in my direction for a profit of 100 points. For this potential gain what could be my potential loss. Few traders actually think about this when they enter a trade, preferring instead to let it run because the trade may turn around. And they wonder why they aren't profitable.
The minimum R:R you would ever want to assume on a trade would be 1:1. This means for every trade you enter you expect to make one point for every point you lose. This is a break even strategy if you accurate 50% of the time. To give yourself a bit more cushion for losses, go for higher R:R. A 1:3 R:R would allow you to be wrong 66% of the time and still break even.
The second consideration, Open Risk, refers to the number of positions you have open against the size of your account. For instance, maybe your account has USD $50,000 in it, if you have 1 position open, with 1 currency lot, and you reasonably expect you could lose 50 points on the deal, your Open Risk is.001. For a 50k account that is pretty conservative. If you have that same trade open with 10 different currency pairs, then your Open Risk is.01
To maintain a reasonable Open Risk, you should try to keep that number to less than 2-5%, this will allow you to sustain a good number of losses in a row and still not go broke. All of this seems like it would be very time consuming, however, once it becomes part of your regular planning, it gets faster and faster.
I maintain a blog that talks about this and many other topics centered around currency trading. Someone who knows a bit about success once said "There is no substitute for hard work." I think Thomas Edison knew a little bit about solving problems and finding solutions. Learning to Trade Forex is Learning Self Control Click Here
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