Before opening a position, a trader needs to find out what the risk and reward ratio is. It is recommended that a good risk and reward ratio is 1:2 and a single trade must not risk more than 2 percent of total trading balance. It is a part of prudent risk management, or so the story goes.
The reason behind having 2 percent risk on a single trade is you will be able to trade at least 50 trades even if you lose them all in a row. Needless to say, this is not going to happen since you will be able to find out that you are not doing things in the right way. That gives you more chance to bounce back with an alternate, and hopefully better, strategy leading to improved trading performance.
Some traders use 10 percent risk on a single trade. However, to use 10 percent risk on a single trade for a semi-skilled trader (and that, for sure, is the category where you'll find me!) is way too high as far as I am concerned.
About 1:2 risk and reward ratio: the lower the risk-and-reward ratio the more chance you have to win them - that's the logic (this article is pretty ok on risk-and-reward and how to play it). Nevertheless, 1:2 is very achievable and this is the healthiest risk-and-reward ratio and is, accordingly, the one most recommended by experienced traders.
On the other hand, some traders love using 1:1 risk-and-reward ratio and they are quite successful too.
To sum it up, it is common sense to maintain proper risk-and reward-ratio and risk manage your trading style - you might win, but you won't lose as much. 'Course, there is no exact science behind it. But there's no exact science in science either...
The reason behind having 2 percent risk on a single trade is you will be able to trade at least 50 trades even if you lose them all in a row. Needless to say, this is not going to happen since you will be able to find out that you are not doing things in the right way. That gives you more chance to bounce back with an alternate, and hopefully better, strategy leading to improved trading performance.
Some traders use 10 percent risk on a single trade. However, to use 10 percent risk on a single trade for a semi-skilled trader (and that, for sure, is the category where you'll find me!) is way too high as far as I am concerned.
About 1:2 risk and reward ratio: the lower the risk-and-reward ratio the more chance you have to win them - that's the logic (this article is pretty ok on risk-and-reward and how to play it). Nevertheless, 1:2 is very achievable and this is the healthiest risk-and-reward ratio and is, accordingly, the one most recommended by experienced traders.
On the other hand, some traders love using 1:1 risk-and-reward ratio and they are quite successful too.
To sum it up, it is common sense to maintain proper risk-and reward-ratio and risk manage your trading style - you might win, but you won't lose as much. 'Course, there is no exact science behind it. But there's no exact science in science either...