Risk-to-Reward Ratio
Before talking about placing stop losses and taking profit you need to understand position sizing and risk-to-reward ratios.
2:1 Risk/Reward ratio can be that you are risking 20 pips to win 40 pips.
3:1 Risk/Reward ratio can be that you are risking 20 pips to win 60 pips. And so on.
Determining Position Size
Position size is the percentage of the money you are willing to risk per trade. We recommend you risk 1%. That means if your account is a $1000 account you will be risking $10 per trade. Let’s say you do not have $1000. Then you still can start trading with $100. But remember that you cannot make a huge amount immediately starting with only $100. But do not let this discourage you.
Let’s say that you start with $100 and you risk 1%. That is, you risk $1 for every trade you make. Then your goal should be to grow the account. If you stay disciplined and do not take money out of your account just yet you can grow your account to $1000 and then $10,000 and so on.
If you are a beginner then we absolutely recommend you start small. Start with $100 and try to grow it to $200. If you can successfully do that, it means you have a winning strategy. Then you can add more money to your account or just keep growing the money you have in your account.
Now that is out of the way, let us talk about the next important thing. The percentage of winning trades. It is extremely important to know your winning percentage. How to know your winning percentage? That is where having a trading journal is extremely important.
We will talk about having a trading journal in the next section. But let us say for example that your winning percentage is around 70%. That means you lose your trades 30% of the time.