Before making your first trade, you need to understand the mathematical logic behind trading.

This will allow you to balance risk versus reward.

Determine when to enter and exit a trade and ensure that you win in the long run.

In general, the profitability of your investment account depends on two factors: your hit rate and the risk to reward ratio of each trade.

Your hit rate is the percentage of winning trades, so if you make ten trades and win six, your hit rate is 60%.

Now, your hit rate doesn’t factor in how much money you made or lost in those trades, just whether or not you won.

If you trade using good setups and solid strategies, you should achieve a hit rate of about forty to sixty percent.

The next thing to look out for is the risk to reward ratio of a trade, otherwise known as the RR ratio.

This will help you achieve big wins, while keeping your losses low.

After all, like the famous financier George Soros once said, it’s not how often you’re right or wrong, but rather how much you make when you’re right and how much you lose when you’re wrong.

So if you only get it right 40 percent of the time, you want to make sure those trades make way more than all the losing trades.

The RR is calculated using three numbers. First, the EP or entry price: this is the price at which you enter the trade.

Next, the TP or target profit: this is the price you expect the stock to reach.

Finally, the SL or stop-loss: this is the price at which you will definitely get out of the position.

To calculate reward, you take the difference between the TP and the EP; while the risk is the difference between the EP and the SL.

The RR ratio is then calculated by taking the reward and dividing by the risk. Hence, the higher the reward, the better the RR, and the lower the risk, the better the RR.

Generally, you should be aiming for an RR of at least two to three, this means that your potential upside is two to three times your potential downside on some trades.

It might even be possible to get an RR of seven to ten.

Risk management is such an important part of trading and has such a huge impact on your profit and loss.

For instance, if you have a hit rate of only 40% but an RR of two, you’ll still end up profitable in the long run because remember, success isn’t about winning every trade, it’s about making those wins count.

In our previous videos, we’ve learned the importance of tracking the big market cycles and how fundamental and economic forces drive those movements in this video. We’re going to look at the top three economic indicators to look out for. In the past, only experienced professionals and economists received this data in a timely fashion, but in the Internet age everyone has access to dozens of economic surveys and indicators every week.

This data can be divided into three main groups: interest rate and monetary policy, employment and jobs data, and consumption and production data.

Now, keep in mind most of this data is based on the US economy since it’s the biggest financial powerhouse that moves global markets.

So, first let’s look at interest rate and monetary policy. For the US, the Federal Open Market Committee or FOMC makes scheduled announcements 8 times a year regarding interest rate or monetary policy. This can have a major impact on the markets because it affects the cost of borrowing and the money supply in the market. Other economies such as the eurozone, China, Australia, Japan and Switzerland have their own scheduled announcements where they set their interest rate and monetary policy.

Next, employment and jobs data. This data is very important because job creation is a leading indicator of consumer spending, which accounts for a majority of overall economic activity. The most important figure is the non-farm payroll which accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. This vital piece of economic data is released monthly usually on the first Friday after the month ends. The combination of importance and earliness makes for hefty market impacts. Other indicators include the employee cost index or ECI employment situation report and weekly jobless claims report.

Finally, there’s consumption and production data. There are various reports that measure different aspects of consumption and production, so it’s up to the savvy investor to piece it all together. Some examples include the Gross Domestic Product or GDP, Purchasing Managers Index or PMI, Philly Fed Report, Consumer Confidence Index, Producer Price Index, Consumer Price Index and the existing home sales report and housing starts. In general, the key is to look out for the kind of news that’s relevant to the current market climate.

For example, when the stock market has been bullish for many years and interest rates are really low, astute investors will keep their eyes peeled for any indication about interest rate increases as these will have a major impact on the market.

So remember, do your research and always make informed investment decisions.