Ever heard of asymmetric trading? Well, if you haven’t here it is, one of the key forex trading strategies and concepts out there.
This blog is a beginner’s guide to Asymmetric Trading; what it is, how it works, and whether it can be any good to you will all be discussed. Let’s start at the start.
What is Asymmetric Trading?
You can guess the meaning from the name itself; asymmetric. It suggests unevenness and that’s precisely what it is. It’s when the potential risk is not proportional to the potential reward.
In other words, asymmetric trading is when there is a disparity between the risk and reward.
There are two types of asymmetric risk reward profiles:
Positive Asymmetrical Risk Reward is when the potential reward is much greater than the potential risk.
Negative Asymmetrical Risk Reward is when the potential risk is much greater than the potential reward.
It goes without saying that as a trader you want the positive asymmetrical profile. So when we talk about asymmetrical opportunities it’s with regards to the positive risk rewards profile.
What constitutes an asymmetrical risk/reward profile?
Usually if the risk is 3 or 4 times the reward, or vice versa, this is considered asymmetrical. This is called 3:1, or 4:1 reward/risk ratio.
A risk of $200 and potential reward of $800 would be asymmetrical; minimum loss and maximum profit.
Why look for asymmetrical trades?
You might be thinking what’s the use of aiming for asymmetrical trades, doesn’t that count as greed? And we always here that emotions need to be separated from trading, so what is this about?
Well, firstly, no this is not greed. It’s a strategy.
In order to understand this fully, you have to consider the risk rule.
You might have heard of the 1% risk rule in trading. This is not a rule being regulated and imposed by an authority, it is more like a good risk management measure.
The 1% Risk Rule
This states that you shouldn’t be risking more than 1% of your account for one trade. It ensures that you trade in a way through which you can sustain your account long term.
However, it puts you in a tight spot though because if you are abiding by the 1% rule and looking for symmetrical trades then you will also be making 1-2% per trade. This means your returns are also limited.
If you are planning on taking it steady and are in no hurry to grow your account and aren’t depending on the profits, then this is fine. But if you are looking for good profits then this doesn’t cut it.
The Perfect Strategy
The best option that you have, if you want to make good returns but also not risk too much of your account, is to look for asymmetrical trade opportunities.
This would mean that you are risking 1% but hoping to make up to 10% of your account. Here your reward to risk ratio would be 10:1.This would mean that you are risking 1% but hoping to make up to 10% of your account. Here your reward to risk ratio would be 10:1.
Know that in forex trading, it is not a wise idea to risk your entire account in the hope of making just as much. It is a huge risk and can result in you losing your trading account completely.
So sticking to a reasonable 8-10% reward is a great option if you are a short term trader and planning to do it for a long time.
When is the best time to find asymmetrical trades?
Now that you know what this type of trading is, you might be wondering how you can find the trades which will give you these kinds of rewards.
There is the highest chance of finding these trading opportunities when the market is undergoing an unusual time. For example,
⦁ When an economic report has been released
⦁ When the market is being affected by unusual political conditions
Usually, fundamental analysis will help you figure out when is a good time to find asymmetrical opportunities. If you want to read up on fundamental analysis, you can do so here.
I hope this proved to be helpful. Remember that to make the most of these opportunities you need to be able to understand the various facets of the economy. Knowing where a currency stands and how it is likely to be affected is the greatest tool a trader can have in their arsenal.