The ‘Risk Reward’ Money Management Strategy

In late 2015, two trading partners, opened a fund offering participants a 50% profit share on a balance provided by the fund. By promising to double the trader’s account balance per 10% profit milestone reached, the partners were offering the most rewarding forex trading career growth programme available.

But what enabled the founders to build a profitable project that funds its recruited traders with a high capital trading account?

The 5%ers fund represents the top 5% of forex traders globally. By demanding a 1:1.5 Reward Risk Ratio, the fund enforced a low-risk tolerance policy, whilst still giving talented traders the freedom to trade using their own strategies. As account balances grow, the fund’s trading ethic is proving that almost any system can utilize low-risk methods for high yield profit. In other words, the fund is creating exponential growth by enforcing humble targets and consistent trading.

Consistency by Being Humble

Greed, ego and emotions are every trader’s 3 most dangerous enemies. Waiting for higher yields on a short-term stock, convincing yourself that you are a trading master after a good trade and impulse trading are just 3 ways to make sure you lose in a market that is larger than us all.

Adopting the ‘Risk Reward’ strategy enables traders to trade consistently and according solely to their trading criteria. When traders know what to look for, less time is invested which can make trading less stressful, thereby minimizing emotional decisions and increasing profits.

As Warren Buffet, arguably the most successful investor ever, stated:

“You must also resist the temptations to stray from your guidelines” and “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”

Not straying from his long-term value guidelines, built a trading empire.

 

A prime example of using ‘the Risk Reward’ strategy, is the Market-on-Close Order – MOC. This allows traders to execute their buy or sell trades at the last price dealt in the market at the end of the trading day. Investors can research a previous day’s trading action, potentially recognizing bullish and bearish patterns, enabling trades according to the market or stock trends. This allows traders of funded trader programs to invest minimal time into research, helping them ignore short-term rumors that could lead to potential impulse trades.

And how does humble targeting create exponential growth? In the case of the 5%er’s fund for example, the low Reward Risk Ratio helps investors trade with more security, as potential losses and required profit per trade are low. As traders execute more trades according to the fund’s guidelines, confidence in their own tactics and criteria increases, resulting in better profit yields. This in turn, helps clients advance towards their milestones, increasing the capital supplied by the fund, further increasing profit margins for both client and fund.

 

By demanding consistency, the ‘Risk Reward’ strategy requires a solid target plan. Not having a trading plan when buying shares can be just as costly as greed, ego and emotion. As sure a thing as the share looks, the market can always go against us. Having a plan can minimize losses, leading to an increase in trader confidence. And what about when things are going well? Traders who set realistic and humble targets will always do better both financially and mentally. As soon as a share is allowed past its target, the trader has allowed emotions and greed into play, and has all but forgotten about target planning.

Building a ‘Risk Reward’ Strategy

The ‘Risk Reward’ strategy enables the trader to invest less effort for equal or greater reward. The trader needs to know what the target is and stick to it. This doesn’t mean that traders need to be stubborn and stick to a losing strategy, rather they must have the confidence to know when to adjust.

Different markets have different volatilities and risks; the trader needs to apply trading strategy according to the market. For instance, in the crypto market, 10-15% drops are not rare prior to a 40% jump in profit. Whereas, in traditional stock markets inter-daily 4-5% profit margins are exceptional. As such, the trader must adjust his acceptable losses and profit targets according to the market.

Money Management is the Golden Grail

The 5%ers fund is a prime example of a ‘Risk Reward’ trading strategy. Exponential growth is the product of humble targeting and low-risk, consistent strategy. By enforcing a 1.5:1 Risk Reward Ratio, the fund has created a controlled trading environment, building trader confidence and ridding itself of emotion and greed.

But the 5%ers are only an example of a controlled environment. We can spend our lives learning and building strategies that come tumbling down in an instance. Until emotion, greed and ego no longer play a part in our trading, consistency and discipline are all but impossible to achieve.

The ‘Risk Reward’ strategy can create an ideal trading framework. In investing less time looking for the hidden goldmines, by sticking to a consistent criteria and accepting humble profits, trading becomes less emotional and stressful and more successful. The real challenge though, is having the confidence to stay consistent when things are not looking so bright.

“The key is consistency and discipline. Almost anybody can make up a list of rules … What they can’t do is give the confidence to stick to those rules even when things are going bad.” – Richard Dennis


Categories: Stock Market

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June 28, 2018 The ‘Risk Reward’ Money Management Strategy