I have noticed that some forex traders here at the forexfactory naively believe that the best and only way to make money in the forex market is to trade with a 2/1 risk/reward or better, meaning that for every dollar that you risk on each trade you get back two or more.
This is of course a myth and here is why:
A roulette at the casino gives you a 35/1 risk/reward situation, every dollar you wager could bring you $35. So your risk here is "only" $1 but your profit (if your number comes up) is $35, a very good risk/reward scenario indeed.
But does it mean you will get filthy rich because this is a good risk/reward bet? Of course not! In fact keep playing that way long enough and you will end up in the poor house sooner or later, because of the casino's built-in mathematical advantage. This is by the way the SAME mathematical advantage that every forex broker possesses on each trade (bet) you are initiating, because of the 3 to 5 pip spread. That's why most forex traders (like casino players) end up losing their money in the long run, even if they are right about the direction of the market 50% of the time!
So in conclusion it does NOT matter if you are trading with a 2/1 or 2000/1 risk/reward, the ONLY WAY to make money in the forex (or futures, stocks, etc...) is to have a STATISTICAL EDGE.
In other words your entry and exit points must BEAT pure random entry/exit points.
This is of course a myth and here is why:
A roulette at the casino gives you a 35/1 risk/reward situation, every dollar you wager could bring you $35. So your risk here is "only" $1 but your profit (if your number comes up) is $35, a very good risk/reward scenario indeed.
But does it mean you will get filthy rich because this is a good risk/reward bet? Of course not! In fact keep playing that way long enough and you will end up in the poor house sooner or later, because of the casino's built-in mathematical advantage. This is by the way the SAME mathematical advantage that every forex broker possesses on each trade (bet) you are initiating, because of the 3 to 5 pip spread. That's why most forex traders (like casino players) end up losing their money in the long run, even if they are right about the direction of the market 50% of the time!
So in conclusion it does NOT matter if you are trading with a 2/1 or 2000/1 risk/reward, the ONLY WAY to make money in the forex (or futures, stocks, etc...) is to have a STATISTICAL EDGE.
In other words your entry and exit points must BEAT pure random entry/exit points.