You can make money with forex trading. There’s enough info out there to make you feel confused. However, when you own up to the fact that forex trading is no quick fix for all the ills plaguing you, you know you can motivate yourself. Intuitively, you will realise that forex trading calls for a lot of dedication, perseverance, staying power, and stamina. You have to be knowledgeable and disciplined.
You have to give up your emotional persona whilst forex trading. Besides, you must know when to wait and when to strike. You make a killing in the market only once you have reached a certain level of training.
The idea of forex trading appeals to you. Like a lot of others, you feel that the bare minimum is sufficient to start day trading. Forex trades all hours of the day during the week. There’s a lot of potential for profits, given the leverage offered by forex brokers. Forex trading does tend to be highly volatile. It really pays to be experienced. Novice traders suffer a good deal before they become seasoned traders.
Make money with forex trading: the risk controlled forex trading strategy
Every forex trader worth his salt manages his risk. It is definitely a vital factor in continuing sustainable profitability.
For starters, you just have to keep your risk on every trade very small. The general rule is 1% in this regard. This implies that if you have a GBP 3000 account, you ought not to lose more than GBP 30 on any one trade. That may seem inconsequential.
However, losses definitely keep adding up. Even a good day trading strategy will witness a series of measurable losses. Therefore, a stop-loss order is instrumental in your risk controlled forex trading strategy.
The risk controlled forex trading strategy: ranking criteria
You will be able to honestly assess and rank your risk controlled forex trading strategy on the basis of two ranking criteria – the win rate and the risk-reward ratio.
Win Rate
Your win rate stands for the number of trades you win out of a specific total. For example, if you win 55 out of 100 trades, your win rate would be 55%. The figure is attainable. In fact, it is also ideal for most forex traders to have a win rate of 50% plus.
Risk/Reward
risk /Reward stands for the volume of capital being put at risk to gain a certain profit. When a trader loses ten pips on losing trades but makes 15 on winning trades, the amount they are smoking on winners more than makes up for the amount they lose on losers.
The implication is that even if the trader just wins 50% of his trades, they will be profitable. Hence, making more on winning trades is also a strategic component, a goal for most FX traders.
A higher win rate for trades implies more flexibility with your risk/reward. A high risk/reward implies that your win rate, even were it to be a tad bit lower, would still keep you profitable.
The risk controlled forex trading strategy: hypothetical instance
If a trader has GBP 5000 in capital funds and has a measurable win rate of 55% on their trades, they risk just 1% of their capital. A stop-loss order makes this happen. For the scenario, a stop-loss order is put 5pips away from the trade entry price.
The target is to put eight pups away. Therefore potential reward for each trade is 1.6 times the risk. Winners will have to be bigger than losers.
It is generally possible to make close to five round turn trades using the above parameters. Each round turn includes entry and exit. Supposing there are 20 trading days per month, the trader is making 100 trades per month.
The risk controlled forex trading strategy: trading leverage
In America, FX brokers offer leverage up to 50 to 1 on major currency pairs. In this instance, we have a trader using 30 to 1 leverage. That is more than sufficient leverage for those into forex trading.
Considering that the trader has $5000, and leverage is 30 to 1, the trader may take positions worth you to $150,000. Risk stays based on the original $5000. The risk is thereby limited to a fraction of the deposited capital.
Forex brokers frequently do not charge a commission. Rather, they increase the spread between the bid and the ask. However, as a rule, they do charge close to $2.50 for every $100,000 traded. Modmount is the most trusted forex broker that offers best trading services and maximum leverage.
Trading forex pairs
When you are day trading a forex pair like the USD/CAD, you run up a $50 risk on each trade. Each movement pip is worth $10 with a standard lot. Hence, you can take one standard lot position with a five pip stop-loss order. The risk of loss on this trade won’t exceed $ 50. There’s also the implication that a winning trade is worth $80(8pips x $10).
The reckoning shows the degree to which a forex trader clouds earn in a month by the execution of 100 trades.
55 trades profitable : 55 x $80 = $4400
44 trades losers : 45 x $50 = $2250.
In case of no commissions (though win rate remains low), gross profit is $4400 – $2250 = $2150.
In case you are using a commission broker (the win rate would stay higher), the net profit is $2150 – $ 500 = $1650.
Considering that there’s a net profit of $1650, the return on the account for the month would be 33%. That is the figure arrived at by dividing $1650 by $5000. So that’s actually an outstanding return.
Considerable slippage relative to expected loss
It will not always be possible to chance upon five good trades every trading day. This holds especially true for times when the market is moving slowly for extended periods.
Slippage happens. There’s no getting around it. The consequence is a more significant loss than expected. This, when you have used a very competent stop-loss order. Rapidly moving markets more often than not demonstrate this truism to us.
Accounting for slippage in potential profit calculation leads to the reduction in net profit by 10%. Here, we assume you sidestep holding thru major economic data releases. That would slash the net profit potential yielded by your $5000 trading capital to $1485 each month.
Make money with forex trading: linking win rate with reward risk
We remember that day traders aim at keeping their win rate close to 50% or above. Were the reward/risk on each trade to be 1.5:1 or above, you would be a profitable trader.
If you maintain a 1.5 reward to risk over 100 trades, you would add 1.5% to your account on winners and lose 1% of account capital.
Were you to win 50% of your trades , you would be in good shape: 50 x 1.5% = 75% – (50 x 1%) = 25%. Your account capital increases by 25% over said 100 shares. Were you to win 40% of your trades, you would not be making any money : 40 x 1.5% – (60 x 1%) = 0%.
Win rate and risk/reward are therefore linked. For example, were you to win just 40-50% of the trades, you could try bumping it up to 50% or more by making minuscule changes to your strategy. Conversely, you could attempt to reduce risk slightly or increase your reward a tad bit to improve your risk/reward.
Slight improvements go a long way towards pushing a break-even or losing strategy towards being a profitable one.
Make money with forex trading: how many trades?
The goal is to win more than 50% of your trades, making 1.5% or more compared to the 1% at risk. If that’s doable for you, maintain the stats with more trades.
In case you trade just a two hour period, you ought to be able to find between 2 and six trades every day. So other things being equal, there’s no stopping you from yielding a return of close to 22% on your capital for the month.
Make money with forex trading: tidying up the stats
If any of the above-discussed stats get skewed, your outcomes will get hurt. A tad bit of a drop in win rate or risk/reward may move you from profitability to unprofitability. An excess of risk on each trade may cut down your account swiftly were you to hit a losing streak.
Winning 50% of your trades will not translate into following the pattern of win, lose, win, lose, win. Wins and losses are spread randomly. There is actually no particular number of trades you ought to take each day. Nevertheless, over time, it ought to average out close to two trades or more each trading day if you aim to overshadow the 10% per month return mark.
Make money with forex trading: critical benefits of demo account trading
The one surefire way to know whether a strategy can produce the numbers above (or even better) is to test out the strategy in a demo account. Take hundreds of trades. When the strategy leads to the outcomes above (or better), you can rest assured, to a degree.
However, as we are never tired of hearing, “Past performance is no guarantee of future results.”
Minor adjustments may be needed overtime to maintain the strategy’s alignment with the numbers discussed above. Your strategy is the one that produces the said numbers. Avoid untested strategies like the plague.
High percentage returns are inversely proportional to the capital volume
Making 10%-20% is very much possible with a modest win rate, a supportive risk/reward ratio, 2-4 trades each day, and risking 1% of account capital on each trade. However, The more money, the more difficult it is to maintain high percentage profits.
There’s a limited amount of buying and selling volume at any given moment. The more capital you have, the less is the likelihood that you will be able to use it at the instant of your choosing. This is generally why only very small hedge funds or individuals can yield massive yearly returns. You would not hear of such returns when discussing hedge funds or individuals with big accounts.
Make money with forex trading: exit strategy
At some point, every trade needs an exit. Getting into a trade is easy. However, where you exit decides your profit/loss. Trades may be closed based on a particular set of conditions developing, a trailing stop-loss order or with a profit target. A predetermined price level where you will close the trade is the profit target.
For instance, if you purchase stock at $10.25, with a profit target of $10.35, you put an order up for sale at $10.35. When the price reaches that level, the trade stands closed.
Trading with a profit target: benefits
Settling were to get out prior to trade even eventuating permits a risk/reward ratio to be calculated. The stop loss is just as significant as the profit target. The stop loss decides the trade’s potential loss. Conversely, the profit target decides potential profit. Obtaining ideal conditions, the reward potential ought to outweigh the risk.
We can never know which trades will be winners and which ones will be losers prior to our taking them. Over many trades, we will see an overall profit provided winning trades are larger than losing ones.
Given that day trading forex and winning trades average 11 pips even as losing trades average six pips, we just need to win close to 40% of our trades to yield an overall profit.
It is possible to evaluate if a trade is worth taking by trading with a profit target. Sidestep the trade if the profit potential does not outweigh the risk. Settling on a profit target actually helps to weed out poor trades.
Profit Targets: pros & cons
Though there are obviously benefits attached to the use of profit targets, there are also instances where such targets bring rather untoward outcomes.
Pros :
- The trade risk/reward is known prior to the trade even being placed when you place a stop loss and profit target;
- Common tendencies on price charts and such objective data are the basis of profit targets;
- Emotion in trading is largely eliminated with profit targets based on objective and reasonable analysis;
- The trader capitalises on a move they predicted and rightly expects reasonable profit on the trade if the profit target is reached.
Cons:
- The placing of profit targets is practically a bona fide skill. When profit targets are placed too far away, there is no likely winning of many trades. Conversely, you will not be compensated for the risk being taken when they are placed too close. Also, neither hope nor fear should dictate such placement;
- Profit targets are hard to attain. The price may have been moving towards the profit target. However, there might be an abrupt course reversal, the stop loss being hit instead;
- Forfeiture of further profit may come about as a result of profit targets exceeding realistic expectations. We note, however, that you can always return and take another trade, provided the price keeps moving in the foreseen direction.
Where to place a profit target?
Placing a profit target is akin to a balancing act. You may wish to extract as much profit potential as possible. However, you can’t get too greedy, lest the target becomes unattainable. Neither too close nor too far – this is the mantra that serves your attitude to profit target placing the most.
Fixed risk/reward profit targets
A fundamental tactic for setting up a profit target is the use of a fixed risk-reward ratio. On the basis of your entry point, it will need your stop loss level. The stop loss will decide how much you are risking on trade. The profit target is set at a multiple of this, for instance, 2:1.
When you enter a short trade at $17.15 and decide your stop loss ought to be placed at $17.25, you risk $0.10 per share. However, when you choose to use a 2:1 risk/reward, your profit would be placed $0.20 from your entry at $16.95.
When you purchase a forex pair at 1.2516, placing a stop loss at 1.2510, you put at risk 6 pips at trade. When using a 2.5:1 reward to risk, your profit target ought to be placed 15 pips distance from your entry point, at 1.2531.
Fixed targets ensure you are making more on winners than you are losing on losers. However, fixed targets remain random since they do not consider price action tendencies or the current price environment. Provided there is a good entry method and your stop-loss is properly placed, you have a reliable method.
Conclusion
If you are enthusiastic about making money with forex trading, you have to be ready for a lot of training. There are methods and strategies to help you get to your trading goal. The formulation of a goal itself will give all an idea of the kind of trader you ought to be. The measures you take to train yourself will have to align with said goal.
Risk management ratios are a vital part of risk management. Particular asset movement insights can be gained only after tedious work but are extremely rewarding. Fine-tuning profit targets is an achievable destination.
Forex trading needs dedication and application. There are no shortcuts to riches.
