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As mentioned in the earlier sections, reward-to-risk, win ratio, and expectancy comprise an important aspect of risk management.

Reward-to-risk or return-or-risk refers to the ratio of the potential win on one's trade compared to the predetermined maximum loss. This is typically calculated based on the number of pips for one's profit target divided by the number of pips for one's stop loss.

For example, if you are going long GBP/USD at 1.7000 with a 100-pip stop and a profit target at 1.7300, your reward-to-risk ratio on this trade is 3:1. If you are shorting USD/JPY at 100.00 with a stop at 100.50 and a profit target at 95.00, your return-on-risk for this trade is 10:1.

Regardless of how much of your account your risk on a particular trade, the reward-to-risk is always based on the ratio of the profit target to your stop loss. Even if you risk 0.25% on a short USD/JPY trade at 100.00 or 1% of your account, if your stop is at 101.00 and your target is at 96.00, your reward-to-risk for both scenarios is 4:1.

It is important to pay attention to your reward-to-risk when taking trade setups to ensure that your winners are larger than your losing trades. It is generally recommended that trades must have at least 1:1 reward-to-risk. For some traders, they prefer taking trades that are at least 2:1 to make sure that they can make up for consecutive losing trades with fewer winning trades.

Another important aspect of risk management is the win ratio. This refers to the percentage of winning trades among all trades taken. For example, if you were able to take a total of 100 trades and won 60 of them, your win ratio or percentage is 60%.

Improving one's win ratio involves conducting fundamental and technical analysis in order to determine which setups have a higher probability of turning out to be winners. This also requires consistency and proper execution of your trade plans. Combined with decent reward-to-risk ratios of at least 1:1 on each trade, you can be able to maximize your profitability in the longer run.

This is where the concept of expectancy comes in. Having a high win ratio doesn't necessarily guarantee longer-term trading success if your winning trades are often much smaller than your losing trades. An 80% win ratio isn't a guarantee of consistent profitability if your average win is at $10 while your average loss is at $200.

Expectancy takes into account your average reward-to-risk on your trades and juxtaposes it with your win ratio. In other words, it gives you an amount you stand to gain or lose for each dollar of risk. This is calculated by taking the product of your average winning trade and your win ratio then subtracting the product of your average losing trade and your probability of losing.

With a positive expectancy, you are able to add gradually to your account in the long run. With a negative expectancy, you wind up gradually depleting your account.

For instance, if a trader has a win ratio of 40% with an average win of $250 and an average loss of $100, the expectancy is $40. This means that he is able to add an average of $40 to his account for every trade taken.

On the other hand, if a trader has a win ratio of 60% with an average win of $100 and an average loss of $200, then his expectancy is -$20. This means that he is actually subtracting an average of $20 from his account for every trade taken.

Drawdown is defined as a considerable reduction in your account due to a series of losing trades. This can be calculated by getting the difference between the highest level of one's account and its lowest point. For instance, when you're initial capital of $10,000 has grown to $10,500 then you undergo a losing streak that brings it down to $9,500, your drawdown is $1,000.

Traders typically look at drawdown as a percentage of one's account balance. For instance, when you lose five trades in a row at 1% risk per trade, your drawdown is 5%.

Aside from looking at one's profit and loss in pips or percentages, drawdown also plays a key role in managing risk. This allows you to determine how much of your account you can stand to lose before being able to recover and land back in the green.

The truth is that traders will have their bad days every now and then, and it's not surprising if one undergoes a terrible losing streak. What's important is that you are able to manage your risk per trade and that you improve the expectancy on your trades such that a good winning trade can allow you to bounce back from most, if not all, of those losses.

For example, if you start with a $10,000 initial account balance and risk 10% per trade. If you undergo a losing streak of five consecutive trades, you will wind up losing half your account in just a few trades! You would need a really good winning trade or a set of profitable ones just to be able to make that amount back.

On the other hand, if you control your risk to just 2% per trade, undergoing a losing streak of five consecutive trades will just give you a manageable drawdown of 10%. If you are able to win a couple of 2-to-1 return-on-risk trades, then you will come close to recovering that drawdown in no time. As you've probably noticed, the reward ratio also plays a key role in determining how you can recover from drawdown.

This is a part of one's trading plan that must be developed based on risk preferences and trading styles. For instance, if you are a swing trader that prefers holding on to trades for days and keeping wide stops, you can afford to risk a full position size on a single trade or divided among a few trades. If you are a scalp trader that opens and closes multiple positions in minutes, you can risk small for each trade then just go for large reward-to-risk ratios in order to bounce back quickly from tiny losses.

At the end of the day, what matters is that you setup your risk management rules such that you can afford to trade again and hold on to most of your account even with a losing streak or a large drawdown. Of course it's also important to do your homework and improve the probability of winning by conducting thorough fundamental and technical analysis.

Perhaps one of the first few questions asked by beginner traders is how much capital they would need to open a forex trading account. Thanks to the introduction of online forex trading and the proliferation of several brokers, the barriers to entry in this market have been significantly lowered that you can open a trading account for as low as $25!

Now before you start dreaming of making billions with a micro account, you should remember that it takes money to make money. Not only does this cover the actual balance you will deposit with your broker, but this should also cover expenses for trading education, software, and tools.

There are several forex websites that offer free education though so beginner traders can be able to understand the basics without having to cough up a large sum of money. Others prefer to undergo coaching or a mentorship program in order to have a seasoned trader to guide them through the process and give advice on trades taken.

Most forex trading platforms already contain charts and the technical indicators, as well as a reliable economic calendar, yet some traders opt to subscribe to live market updates or invest in a more stable charting platform. Again, these depend on your preferences and how much you are willing to spend in your trading endeavor, although some free resources offer just about the same level of quality.

As for the actual trading capital, many recommend starting with an amount that you won't mind losing. Of course this is not to foretell that you will lose all your trading capital at the beginning, but it doesn't hurt to be prepared for the worst-case scenario. Besides, you should be trading an amount that you are comfortable with in order to prevent emotions such as the fear of losing from crippling you in your trade decisions.

Take note though that as some businesses fail due to undercapitalization, the same principle applies in forex trading. If you are not ready to risk real money on a live account just yet, you would be better off trading with a demo account first. Although this does not completely replicate the experience of trading live, this gives you the chance to build and refine your skills with no monetary risk at all. Once you are able to chalk up consistent returns, then you can be able to trade a live account from a much more knowledgeable position.

In forex trading, there are several factors that you can't really control. While you can be able to make predictions based on fundamental analysis or a review of past price action, the element of uncertainty is always present and you can never fully eliminate the possibility of losing a trade.

Risk management separates successful traders from those who wind up blowing their entire trading account. When you manage your risk properly, you take control of how much of your capital can be lost on a trade or set of trades. Risk management allows you to limit your risk even if the worst-case scenario takes place.

In order to make consistent returns, a trader has to make sure that he will be able to bounce back from a loss in case price action does not go in his favor. Determining how much to risk per trade depends on one's risk profile, as aggressive traders tend to risk more while conservative ones opt for a smaller exposure.

There will always be losing days for traders, no matter how good one gets when it comes to understanding the markets. A trader who is able to manage his risk well can eventually make up for these consecutive losses with his winning trades later on. This can be done by practicing proper position sizing and taking the reward-to-risk ratio into account – concepts that will be discussed in a latter section.

With all its significance, it's ironic that risk management is often the most overlooked aspect in trading. Traders tend to focus too much on getting the best possible entry or predicting accurately how currency pairs will behave that they neglect to take risk management into account. In some cases, traders could wind up being too confident in their trade setup that they go all in or risk too much on a single trade, only to get blown out of the water with an unforeseen market event.

Without any proper risk management, forex trading becomes no different from gambling. This usually involves zooming in to potential returns on a single trade and ending up overleveraging or risking too much, that one loses track of the longer-term horizon and the drive to seek consistent returns.

Remember that there is only so much you can do when it comes to figuring out the most probable scenario for price action, and the market takes care of the rest. To ensure that you live to trade another day, it is crucial to pay closer attention to proper risk management.

Another useful tool in fundamental analysis is using the U.S. dollar index or USDX for short. This keeps track of the dollar's performance against a basket of currencies.

Included in this basket of currencies are the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc. Aside from providing a general direction of dollar behavior, this also tracks the U.S. economy's performance against a total of 22 economies, as the euro is a shared currency among 17 nations.

With that, the USDX could serve as a barometer for most U.S. dollar pairs and future dollar price action. Technical levels are generally respected by this index, with tests of support and resistance likely to hint of potential market turns.

The USDX is measured in points, usually until the third decimal place using a base of 100.000. This means that an 88.500 value reflects a 11.5% drop in the U.S. dollar's value against the basket of currencies. A 105.675 reading shows a 5.675% increase in the dollar's value relative to the other six currencies.

Analysts have begun looking at this index around the 1970s as leaders of the world's biggest nations back then met in Washington to agree on a standard against which their currencies can float freely against. This means that the value of their currencies is relative to the U.S. dollar.

Other versions of the dollar index were constructed since then. Among these is the trade-weighted dollar index, which takes into consideration the trade values of goods from other economies. This was constructed by the Fed to monitor the competitiveness of U.S. products in the international scene. The weights are adjusted periodically but this index isn't usually monitored by forex traders, as the basic USDX has been the norm for tracking the Greenback's performance.

When it comes to predicting forex price moves, technical and fundamental analysis can also be applied on the dollar index to forecast future price action. Trends are monitored and leading or lagging indicators can be applied. Inflection points such as round numbers or retracement levels can also be indicative of potential market corrections or reversals. Chart patterns and Japanese candlestick formations are also useful in predicting USDX movement.

From there, the behavior of EUR/USD, USD/CHF, GBP/USD and other dollar pairs can be predicted. When the USDX is projected to bounce, it is reasonable to assume that EUR/USD could selloff or that USD/CHF could also rally. When the USDX is expected to drop, one can predict that GBP/USD would climb or that USD/JPY would weaken.

What's important to keep in mind when using the USDX in predicting currency price moves is whether or not the U.S. dollar is a counter currency or base currency. For instance, the USDX is inversely correlated to EUR/USD's moves because the U.S. dollar is the counter currency in this scenario.

Watching long-term trends in the dollar index is also useful in observing the Dollar Smile Theory. This is a phenomenon that helps swing traders predict whether the U.S. dollar can react to fundamentals or risk sentiment.

It has been observed that the dollar tends to act more of a safe-haven when global economic performance is very weak or in times of recession. During these cases, weak data tends to support the U.S. dollar's rallies while strong data leads to a dollar selloff.

However, when the global economy is more or less stable, the U.S. dollar can be more sensitive to U.S. economic data. This means that weak U.S. reports lead to a dollar selloff while strong reports lead to a rally.

With interest rates dictating the rate of return for holding assets denominated in the local currency, forex traders also pay special attention to interest rate differences when it comes to keeping their positions open for a long time. This is because the interest rate difference is carried on when a forex position is kept open overnight.

This practice is known as carry trade. When you are buying a currency that has a higher interest rate compared to the counter currency, you can take advantage of positive carry. In other words, you gain a small interest on your forex position if you keep it open until the next trading day and your broker will add that amount to your profits.

Conversely, when you are buying a currency that has a lower interest rate compared to the counter currency, you are losing from negative carry if you keep the trade open for days. You lose a small part of your forex position to the negative interest rate differential, which gets applied to your profits on the next trading day.

For instance, if the Reserve Bank of Australia offers 3.00% interest while the U.S. Fed offers only 0.25%, going long AUD/USD could give you a 2.75% additional return based on your position if you keep your trade open for a year. Shorting AUD/USD gives you a 2.75% loss on your profits if you hold on to your trade for a year. Overnight gains or losses are determined as a part of the annualized interest rate differential.

You've probably guessed that much longer-term positions have the potential of benefitting from purely positive carry. Even if you lose from the actual trade or if price doesn't move at all, you can gain profits each day just by keeping the trade open for a really long time. On the other hand, negative carry can wind up eating a chunk of your profits even if you make small wins on the actual forex trade.

Carry trades can therefore maximize the profits on long-term trades, especially when risk is on. This can be determined by using the market sentiment analysis techniques discussed in the earlier section. When higher-yielders are likely to rally, a trader can benefit from long positions and from the positive rate differential.

Of course carry works negatively when risk is off. Not only do higher-yielders sell off, but also holding on to a short position with these currencies could reduce your profit potential.

Briefly introduced in the earlier sections is the concept of market sentiment, which involves gauging whether traders are in the mood to take on more risk in their portfolios or not. This is relevant in the forex market because higher-yielding currencies or those with central banks offering higher interest rates tend to benefit during risk-on market environments while lower-yielding currencies or those with central banks giving lower interest rates enjoy stronger demand when risk is off.

Risk-on or periods of market risk appetite refer to those instances when traders are more confident about global economic performance and prospects that they are in pursuit of higher yields, which generally carry a greater amount of risk.

On the flip side, risk-off or periods of market risk aversion include those times when traders are pessimistic about global economic performance and prospects, causing them to be more cautious and in favor of lower-yielding safe-haven assets.

As of this writing, the major economies that offer higher interest rates are Australia, New Zealand, and Canada. Aside from the fact that commodity currencies are also sensitive to global economic performance, the Australian dollar, New Zealand dollar, and Canadian dollar also enjoy significantly higher interest rate differentials from other major currencies, such as the U.S. dollar or Japanese yen. With that, the comdolls tend to rally when risk is on while the Greenback and yen benefit from risk aversion.

Lower interest rates don't guarantee safe-haven status though, as the euro is a prime example of a currency with a low interest rate that isn't considered as a flight-to-safety option. Even though the European Central Bank already offers low interest rates, the likelihood is that further easing measures or interest rate cuts can be implemented, thereby giving the possibility of lower returns on euro holdings.

Aside from looking at equity performance or monitoring global economic trends, another way to gauge market sentiment is to look at the Commitments of Traders Report as released by the CFTC or Commodity Futures Trading Commission. This weekly report indicates how many commercial and non-commercial traders are long or short the major currency pairs.

With this strategy, traders usually focus on extreme short or extreme long positions in order to pick market tops or bottoms. When traders are extremely short on a currency, there is no one left to sell, which means that the market will eventually turn. When traders are extremely long on a currency, there is no one left to buy, which means that price could eventually fall.

To get these figures, you simply have to visit the CFTC webpage and look for the COT report then view the short format. Just look for the currency you are interested in to see the current positioning of traders. It also helps to compare to the previous week's report to see if more short or long positions were added. Sudden shifts in positioning could also be a sign of a market reversal.

Aside from watching economic data releases or keeping track of central bank policy biases, monitoring other financial markets can also be helpful in predicting forex price moves. To be specific, there are currencies that move in tandem with asset prices or precious metals while others are negatively correlated to other financial markets.

For one, the Australian dollar has been observed to have a positive correlation with gold prices. This is probably because Australia is the third-largest gold producer in the world and any increases in the precious metal's value is bound to be positive for the Land Down Under's export revenues. This then translates to better growth prospects, which boost the Aussie's value.

Another interesting financial market correlation with forex is that of U.S. dollar and gold. Unlike the Australian dollar, the U.S. dollar has an inverse correlation to the precious metal's price. After all, gold is usually treated as a hedge to U.S. inflation.

Aside from that, traders tend to park their money in gold if risk appetite is strong. This takes place when global economic performance is strong and traders are more confident in pursuing riskier assets. In that case, the lower-yielding and safe-haven U.S. dollar gets dumped in favor of gold. On the other hand, when risk aversion is in play, traders buy up the U.S. dollar and let go of their gold positions.

More often than not, the Swiss franc also has a positive correlation with gold, as most of the country's reserves are linked to gold.

When it comes to other commodities and currencies, it has also been observed that crude oil and the Canadian dollar have a positive correlation. This is because Canada is one of the top oil producers in the world, with roughly $2 million worth of barrels per day. The U.S. economy is its top oil buyer, which means that rising fuel demand from the global economy can drive the Canadian dollar higher.

Aside from commodity prices, bond prices also tend to have a correlation with forex market price action. Simply put, a bond is an IOU issued by an entity to its bondholders. Bond prices and yields that are monitored by traders are usually government debt securities.

What's particularly tricky about this type of financial instrument and its correlation to currency trading is that bond yields instead of prices are usually monitored. Bond yields refer to the rate of return when one buys government bonds and these are inversely correlated to bond prices.

Bond yields usually serve as an indicator of local stock market strength. When stock prices are rising, bond yields are also rising while bond prices are falling. On the other hand, when stock prices are falling, bond yields are also dropping while bond prices are rising. In relation to the forex market, the local currency tends to move in tandem with bond yields.

Fixed income securities also show correlations with the forex market, more often than not. Economies that offer higher returns on their fixed income securities tend to have a stronger local currency while those that offer lower returns on their fixed income securities usually have a weaker local currency.

The forex economic calendar is one of the most useful tools for traders, especially those who incorporate fundamental analysis in determining their currency biases. A typical forex calendar lists the upcoming data releases and indicates whether those could have a strong or low impact on the currency involved. These also post the previous period's data results to provide the trader with a point of comparison in gauging if improvements were made, along with the market consensus.

Simply put, a stronger than expected release or one that marks a considerable improvement from the previous period's data could lead to a rally for the currency since these could eventually translate to tighter monetary policy. On the other hand, a weaker than expected release or one that is lower compared to the previous period's data could lead to a selloff for the currency since these could result to easier monetary policy.

Not all economic reports listed on the forex calendar are ideal to trade though, as some could simply generate small price reactions or serve as bigger picture indicators rather than resulting to significant short-term moves. The larger reports, such as the GDP and CPI, tend to large and prolonged price movements since these provide more or less an idea of how the economy is faring from a bird's eye view.

In particular, the GDP or gross domestic product provides a neat number that sums up how the economy fared and this is usually reported on a quarterly basis. As such, it is one of the clearest gauges of economic growth, as a positive GDP reading would mean that the economy expanded over the period while weak GDP reading would signal contraction. Consecutive quarters of economic contraction would then constitute a recession, which turns out to be very bearish for that country's currency.

The CPI or consumer price index measures changes in price levels and this is usually reported on a monthly basis. It is also closely linked to monetary policy since the central bank's mandate is to maintain price stability. When prices keep climbing, the central bank has to employ its monetary policy tools in order to prevent inflation from surging out of control. Conversely, when prices keep dropping, the central bank also has to make monetary policy adjustments in order to stoke inflationary pressures and prevent a deflationary cycle from occurring.

On the other hand, data such as producer prices or wholesale sales don't generally result to significant price moves for the currency involved. Instead, these could serve as underlying data when one is trying to predict how larger reports such as core CPI or consumer spending might turn out.

Retail sales, manufacturing production, or trade balance releases tend to have varying levels of impact depending on the currency involved. Trade-dependent exporting economies, such as Australia and New Zealand, have currencies that are more sensitive to trade balance data. Meanwhile, economies that are heavily reliant on the consumer sector have currencies that react to retail sales and household spending reports.

Monetary policy and interest rate expectations play a central role in fundamental analysis, as these determine the rate of return for holding a country's assets and therefore the demand for its currency. As mentioned in the previous section, central banks' decisions carry a major influence in this regard.

Of course these decisions are based on a number of economic factors, including overall growth, inflation, consumer spending and confidence, and trade activity among many others. These data can be found in economic databases online and fresh releases can be tracked using an economic calendar.

Generally speaking, consistent economic improvements and expectations of strong performance could lead a central bank to tighten monetary policy. This involves decreasing the amount of money in circulation, which then causes the value of the currency to go up, or increasing interest rates. These tools are employed in order to prevent the economy from overheating or inflation from spiking out of control.

When traders see consecutive improvements in economic data, interest rate hike expectations tend to build up and push the value of the currency higher even before the actual monetary policy decision is announced.

On the other hand, consecutive declines in economic performance could convince a central bank to ease monetary policy. They can either increase the amount of money in circulation, which then causes the value of the currency to drop, or by decreasing interest rates. Both of these moves are designed to encourage lending and spending, which eventually translate to stronger economic performance.

When traders see a prolonged weakness in economic data, interest rate cut expectations grow and push the value of the currency lower even before the actual policy decision is made.

Central banks can also intervene in the foreign exchange market, as the Swiss National Bank has been notorious for doing. These are very rare occasions when the central bank thinks that the currency is overvalued and is starting to take its toll on the country's export industry. After all, a higher currency value means that exports are relatively more expensive in the international market, which could then hurt demand. A central bank can conduct currency intervention by selling a large amount of its local currency in order to drive its value down.

Testimonies by central bank officials also tend to influence forex market price action as these contain clues on what their next monetary policy moves might be. This is why central bankers' speeches are also marked on the economic calendar, usually as a top-tier event when it's the central bank head speaking.

Minutes of policy meetings also carry weight in price action, as these also provide hints on how the other members of the board think the economy is faring and whether monetary policy adjustments are needed or not. Traders usually monitor when there is a change in bias and start pricing in potential policy tightening or easing ahead of time.