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Today I am going to explain one of the most crucial things to being a successful trader which will help you make money in trading.

RISK REWARD.

Why Risk Reward is important?
Because in trading no one is 100% correct and its all about probability, and no matter how good the trading system is, there will always be losing trades. In order to be successful, we want to make sure that our profits are greater than our losses. I don't mean less losing trades, but I mean a loss of equity.

So as an example, lets say we have a risk to reward ratio of 1:1. This means that if we take 100 dollars of risk on each trade then our reward could be 100 dollars as well.

Now lets assume that we have a trading system which is 50% profitable. This means that out of all the trades we take, 50% of the time we lose and 50% of time we win. So with 1:1 risk reward, we will end up at a break even. 
Lets see how this works: If we take 10 trades, 5 are losing trades and 5 are winning trades. This means we lose 500 dollars (5x100) and we gain 500 dollars (5x100) and its a break even.

But if our risk reward ratio is 1:2 that means for every 100 dollars we risk, our reward could be 200 dollars. Now lets take the same 50% profitable trading strategy. Again, using this strategy if we take 10 trades then 5 are winning and 5 are losing trades. But in this case, due to the change in risk to reward,  (5x100 = 500 loss) and (5x200 = 1000 profit), overall we made a 500 dollar profit (1000-500). 


Ultimately, looking at the two examples above, even if we keep the same trading strategy (50 % win/loss) and only modify our risk to reward ratio, the total output changes. 

In conclusion, a risk reward  ratio higher than 1:1 is much more important than any trading strategy. Even if we have less than a 50% profitable strategy, we can still win in trading if we have a high risk to reward ratio.


Happy Trading to All.

NOTE: If anyone wants me analyze any specific forex, cryptocurrency or stock chart please let me know and will do my best to analyze it.

NOTE: I am not a financial advisor and this is for education and entertainment purpose only. This is not a trading advise and just my opinion, please trade at your risk and do your research.