• December 28, 2016

Importance of risk management factor in Islamic forex trading community

A lot of new Islamic retail forex trader has joined the forex community in the last few years. Many Muslims are becoming forex trader because broker gives them the facility to trade in the mt4 platform and earn money from a halal way. Muslim always selects the broker which offer them the swap free trading account. Nowadays many reputed brokers are offering swap free trading account which makes the fx trading so much popular in the Muslim community.

Because the Muslim traders are comparatively new in this forex market they have to work really hard and should know the basic and important things in the forex market in order to make a regular profit from the forex market. Risk and reward ratio is one of the most important things that a Muslim forex trader should learn in order to become a professional forex trader. A true profitable Muslim trader always maintains his money management system and use the risk and reward ratio system in their every single trade. Today we are going to discuss why risk reward ratio is so important in fx trading and how we can master this system.

What is risk reward ratio?

This is one of the most vital things is in fx trading. You may wonder why this is so important in forex trading. But trust me when you are going to learn this thing and apply in your trading strategy then you will realize this is one of the key ingredients for successful forex trading. Every single trader should come up with a pure money management system and strictly follow this risk-reward ratio. You need to make sure that you are managing and maintain your risk reward ratio in every single trade. If you do not use money management in every single trade then you will not be able to earn money from this forex market. In order to become a consistent profitable Muslim forex trader, you must have to implement risk reward ratio in every single trade that you take in the market.

Money management and risk reward ratio are the most important things that the trader should always follow. But when it comes to real life trading, most of the traders do not know how to use money management and take the full advantage from this. If you use the risk and reward ratio in you trade you will get the full advantage of it and will be able to make consistent profit from fx trading. Most of the trader want to make a large profit in a single trade but they don’t realize the associated risk involved in using the big lot size. They don’t use any stop loss in their trade and this is one of the biggest mistakes that a trader can make. If you want to remain profitable then you should have to use the stop loss in every single stage on you trading career. That’s where risk and reward ratio comes handy. By using the risk reward ratio properly you can eventually afford to lose more trade in the market and still remain on the profitable side at the end of the month.

Simple math for risk reward ratio

Every trader should learn how much risk he can take in his trade. A trader should always know their potential stop loss in the market before they execute any trade in the market. Before the execution of a single trade, he should know how much money he is risking in a single trade. Most of the retail forex traders make mistakes while setting up the stop loss in the forex market. They either put their stop loss to close or make it wide in the market. They try to minimize their risk by putting the stop loss too close to their entry but that will not help at the end because they did not give enough room to their running trade. If you put your stop to close then the market might hunt you down and then it will move in favor your direction. So first thing first, makes sure you know how to put the stop loss in the market.

Let’s say that you executed 10 orders in the market suing 1: 3 risk reward ratio. To be precise you are risking 30 pips in every single trades and gaining 90 pips for your winners. After the execution of all trades, out of 10 orders, you lose in 7 trade and win only 3 trades in the market. Now calculate how many pips you gain and lose from your winning orders and the losing ones You have seven losing trades in the market which mean 7*30= negative 210 pips and for 3 profitable you gain 3*90= 270 pips. So your overall gain is 270-210= 60 Pips. So the thing is, you made a profit from your ten trades though you lose most of your trade. That is the beauty of using risk reward ratio. Only a few winning trade gives you the winning edge due to the perfect implementation of risk reward ratio. Always use 1:3 risk reward ratio while trading the financial instrument. Most of the professional forex traders in this industry are losing more trades in the market but yet remains profitable only because they use perfect risk-reward factors in every single trade. They always make sure that their winners are always bigger than their losers.