In my blog to date, I've given a general overview of trading and hopefully built some kind of a foundation and an understanding for new wannabe traders. You should now at least be aware of what it might take for you to become a consistently profitable trader. Do you believe that you are willing to put in the work and make the sacrifices it takes to become one of the 5%ers?

To achieve any goal, you have to discover the price that you will have to pay to achieve it, and then you MUST pay that price!

Now, let us continue.

To be a profitable trader you do not need to win every trade. Allow me to introduce you to Mr or Ms Risk:Reward. From now on they will simply be know as R:R. In your trading it is R:R that will make you a consistently profitable trader. R:R will be your friend, if you allow it to be.

Let me explain, please.

• If you Risk $10 on a trade and you make $10 from that trade, then your R:R was 1:1, as you risked $10 to make $10.
• If you Risk $10 on a trade and you make $20 from that trade, then your R:R was 1:2, as you risked $10 to make $20.
• If you Risk $10 on a trade and you make $30 from that trade, then your R:R was 1:3, as you risked $10 to make $30, and so on.

So, lets say your trading method produces a win ratio of 50%, meaning you only win half of the time. Therefore after 10 trades you would of had 5 wins and 5 losses.

• From these 10 trades, in the first case with R:R of 1:1, you would make $50 (5 x $10), and loose $50 (5 x $10)- so you make $0 (Break Even or BE).
• In the second case with R:R of 1:2, you would make $100 (5 x $20), and loose $50 (5 x $10) - so your profit after 10 trades is $50.
• In the third case with R:R of 1:3, you make $150 (5 x $30). and you loose $50 (5 x $10) - so your profit after 10 trades is $100.

That is the power of R:R! At an R:R of 1:2 and above, you only need to win half the time to make money. To make larger profits, you just need to increase your stake, or increase your R:R, or increase your win ratio.

Run some figures for yourself and you will see that you can even lower your win ratio (ie. loose more that half your trades), and still make a profit, if you increase your R:R.

In the next installment, I will go about showing you how to set up your R:R for trading.

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