How to NEVER blow up your forex account

In a previous post we looked at why a 1:1 risk reward ratio makes the most sense for trading. Here we will look at how to apply it in real life trading.

When looking at a 1:1 risk reward ratio theoretically such as the example on the left above we do not take into account spreads or commissions.

Let us take an example of a 1:1 risk reward ratio with a target of 10 pips. Let us assume that commission and spread is 2 pips, so there is a 2 pip cost to place trades.

If we placed 20 trades in a row at random, 10 will go into profit 10 will go into a loss, however only only 8 pips will be made when each trade goes into profit because of the 2 pips spread and commission, resulting in an overall loss:

10 x (10 - 2) pips : 80 pips profit

10 x 10 pips : 100 pips loss

Adjusting the for the spread & commission we need to change the take profit to 12 pips 10+2 (pips spread and commission) as can be seen on the example on the right above. Now trading 10 trades in a row at random will result in the following:

10 x (10 + 2) pips : 120 pips profit - (2 x10 pips spread and commission) : 100 pips profit

10 x 10 pips : 100 pips loss

This method is the key to never blowing up your account, providing that you trade on a 1:1 risk reward ratio and adjust for spread and commission, you will remain at break even placing trades at random.

#forex #scalping #safetrading