Why Risk adjusted returns is your priority

With risk adjusted returns, your return is based on only putting a certain amount of capital at risk to ensure a profit. That means you actually calculate how much capital you are putting at risk. This is performed using such volatility metrics as standard deviation or Value at Risk. Although this is beyond what most Forex traders will need, it is useful to be aware of it. These metrics are most often used by large banks to calculate how to assign their capital in the most efficient way possible.

An area where the retail Forex price action trader can adjust their risk, is through their position sizes. We recommend only taking 1/2% of your portfolio as the absolute maximum in any given position. Although your profit may be small, you are also ensuring that your loss is smaller if the worst happens. How can the loss be smaller you ask? Another risk adjusted returns approach can help...

The risk reward ratio is one of the key risk processes that any retail Forex trader should use. Anyone looking to trade Forex will by definition be looking to buy at one level and sell at another. The risk reward ratio allows you to quantify your risk and insist that the opportunity will produce double the profit for the risk you are taking. This is achieved by using stop losses, where you will set these up so as to have a minimum twice the profit than the risk you take. This method is akin to set and forget. You are setting up your trades and forgetting about them. You can do this while safe in the knowledge that your stop losses will trigger if your profit target is met, or if the trade is going beyond the capital you are prepared to risk. This ratio should be used by all aspiring Forex traders due to its simplicity and for its contribution in making you a consistently profitable trader.