Monday, May 11, 2009
Trader why opened an account of USD 50′000. He buys EUR/USD 500′000 @ 1.3500 at the market and places a stop loss order at 1.3460. This point shows that his maximum risk is USD 2′000 and his margin utilization is 10%, well above the minimum. During the trading day the Forex market fluctuates and initially moves down to 1.3480.
At this point trader Y has an unrealized loss of USD 1′000 and his margin utilization has fallen to 98% reflecting the effect of the downward move on his margin capacity. Later the price moves back up to 1.3600 and trader Y decides to take profit.
He sells at 1.3600 making a USD 5′000 profit which represents a 10% return on his account value. Note that trader Y took only a risk of USD 2′000 and made a return of USD 5′000 this equates to a risk/reward ratio of 2.5. A high risk reward ratio is what every trader should be aiming for. Please note that the example above is a random case and in no way is meant to illustrate that the potential for profit is always greater than the potential for loss in foreign exchange trading
He sells at 1.3600 making a USD 5′000 profit which represents a 10% return on his account value. Note that trader Y took only a risk of USD 2′000 and made a return of USD 5′000 this equates to a risk/reward ratio of 2.5. A high risk reward ratio is what every trader should be aiming for. Please note that the example above is a random case and in no way is meant to illustrate that the potential for profit is always greater than the potential for loss in foreign exchange trading
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