Powerful Ways to Ramp Up Your Money Management

money management Jul 01, 2019
 

 

 

 

Have you ever wondered why professional traders even care about their average risk vs reward? It's all about win % right? If your win % is high, your account will grow and you will make it in no time right? Now, what is your account telling you or what was it telling you when you first started out trading (in case you're already more advanced and sit there grinning, knowing what I'm about to say)? 
Your account - not your mom, but she might agree with your account - says that it matters what your average risk vs reward is.


But Why Does It Matter?

That's very simple. You can still have a high win % (let's say 85% or even higher), but if those 15% of losing trades are so big in $-value that they are bigger than the total $-value of your 85% winning trades, your account is still shrinking. Even if the losers don't outweigh your winners, but your risk vs reward is very low, you need to start working on improving it, because otherwise you are wasting skills, because you do have exceptional skills if you have such a great average win %.


How Do I Calculate My Average Risk vs Reward?

Calculating your average risk vs reward is not that complicated, but it may be a bit time consuming, because if you didn't write down the risk vs reward of each trade you did, you will have to go over all of them. Which, yes, may be a lot of work, but you should still do so, as will become clear further down in this article.

So if you have already written down the risk vs reward of each trade you did, you just take the sum of that and divide it by the amount of trades.

If you haven't then go back to all the trades you did and for each trade write down what the risk vs reward was. You do this by looking at what your risk* was and then seeing how much of that you had in reward.
For instance you risked $100 on a trade and you earned $150. Then your risk vs reward is 1:1.5 (or 1.5R as we like to say at Urban Forex). If you risked $50 dollars and your stop loss was hit, then your risk vs reward is 1:-1 (or -1R).

*Note that you always need to use stop loss. Without stop loss you are not protecting your account and that is your main job as a trader. Protect your account to trade another day tomorrow (even if today wasn't good). So always use stop loss. 

What Is More Important?

I get this question a lot and the answer is quite straightforward. They are both equally important. It's very hard to have a growing account with only one of them at a high level.
I can however say that it is easier to make the win % go up significantly, than it is to increase your average risk vs reward. Making your win % go up comes more down to having direction right and with the Mastering Price Action principles that is fairly straightforward. Getting a better risk vs reward requires a full mastery of all the different parts of trading. 
And note that small differences in either can have a big impact on how your account is doing. So perhaps you are closer to reaching your goals than you think!

So go ahead and start filling out risk average risk vs reward and your average win % in the calculator above. And then start playing around with either one of them to see how you can tweak your trading ever so slightly to greatly change the outcome. Let me know how it goes!

- Armand at Urban Forex

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