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ForexTraderX

Watch A Typical Day Of A Real Day Trader

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ForexTraderX

 

Thanks for taking the time to answer my questions. Btw your market charts are exceptionally clear and well thought out, like your answers.

 

Can you tell me what your win rate is and ROI % ?

 

Also which of the markets that you trade do you find trend best ?

 

Which futures emini or Forex pair would you suggest for a beginner to trade ?

 

Hey Henry, sorry it took so long for me to get back to ya... been a bit busy, and only trading lightly...

 

to answer your question about win rate at ROI% is... for my futures trades my win rate is about 60%-65%. It's been that way for a long time now. My futures trades make about just as much on my winners, as I lose on my losers. Of course, this is all true if I'm not "trading emotionally stupid". However, I've managed to shield my futures account from the vast majority of such, because I only trade futures when I feel up to engaging the market on a tick by tick basis...and when that happens, I usually tend to be in a good place, psychologically speaking.

 

I don't actually track % ROI for my futures trading, I just track dollar amount, average size winner/average size loser, and drawdown (all done on a weekly and monthly basis). it's a pretty high percentage, in terms of percentage... but I primarily determine my risk on each trade by how much I'm willing to risk in terms of dollars (usually between $50 - $200, sometimes up to $300). my monthly take in futures trading typically ranges maybe $500 - $3,000... however, over the last 24 months, my best month has been well over 10k, my worst month, about 4K loss. Because this year has been "bad" for me so far, I have been risking much less on any given situation, so my recent monthly P/L average is smaller than it has been historically for me.

 

My win rate with my spot forex trading is about 75%... but that is deceiving, because it includes trades that have stopped out for a very small profit (net of 1-5 pips on original position at entry). If I discard those trades, it's about 55%-60%, but my winners are bigger than my losers by about 1.5R:1R

 

In spot forex I typically make about 4%-8% per month, a bad month is typically down between 1% - 5%, a good month may be 10% - 12%... but again, this year has been tough for me, and I managed to about halve my spot profits this year in just a few days (this occured almost 2 months ago now) due to emotional BS. Since then, it's been back and forth, though I feel i've addressed most of those "leaks", and has been stable the last few weeks, so I'm expecting to keep consistent now for the rest of the year (which will be a contrast from the first part of the year)

 

Gee... as far as what market for a beginner to trade... that's actually a very tough question for me to answer for you. I would need to know more about what you are expecting from your trading, your own trading style right now, your time constraints, your capital base, etc...

 

I will say this... if I HAD to give you an answer without such information... I would say something like: Don't limit yourself to a single market. Look for the absolutely strongest opportunities, and take them in whatever market they present themselves in.

As far as spot forex goes, I would look to trade the strongest against the weakest market, but I would wait for a very specific criteria to set up... let me explain and give you a few pics... i'll do so in the next post here because It may be something for everyone to learn from...

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About 2 days ago, there was one heck of a good trading opportunity in the EUR/CAD.

 

It was one of those days, that the market just moves relentlessly in one direction. However, many people may have missed the opportunity, because it had in fact moved relentlessly in one direction the day prior, and "usually", after strong one directional moves

 

This may not always be able to be "predicted" ahead of time... but here is a specific concept that any trader can make good use of. It does require some discretion, and it does require some patience... but it's about as "no lose" a situation as one will find in the forex markets.

 

Essentially, it is this:

 

Find two pairs comprised of 3 different currencies, with both pairs showing clear evidence of moving in a particular direction (either both up, or both down)... then look to take the strongest market long against the weakest market.

 

As usual, this is easier to show than tell.

 

Lets take a daily chart of the USD/CAD, the EUR/USD.

 

As you can see from the pics attached, the same day that the USD/CAD makes a nice bullish "pinbar" (implying the next 24-48 hours will see price move up, rather than down)... we also have a very strong bullish "breakout" candle on the EUR/USD (also implying, that the EUR/USD will see price move up over the next 24-48 hours).

 

So, if you follow this to it's logically conclusion... it looks like the next day, the USD is very likely to be bullish against the CAD

 

It also looks like the EUR is very likely to be bullish against the USD.

 

So, if the CAD is weaker than the USD, and the EUR is stronger than the USD, well, gee, it probably stands to reckon the BEST trading opportunity will be somewhere in the EUR/CAD... to the LONG side!

 

The last pic is a 30 min chart of the EUR/CAD.... as it moved on the day following the bullish candles in the USD/CAD and EUR/USD.

 

As you can see in the intraday pic of the EUR/CAD, we didn't really even pull back at all. It just went vertical the entire day.

 

Without knowing more about you or your trading style, this is probably the best overall general recommendation I could make for you. Look for this type of situation. It doesn't occur every day, maybe not even every week, but it will set up in the major forex currencies maybe 3-4 times a month, and those are the days where you really can't go wrong if you just go with a long trade in the strongest market, and a short in the weakest market.

 

One very simple way to trade it (which I personally do not do, but it would likely provide a decent edge) would be when you see such a situation, just go long the strongest market, and short the weakest market, just as the NY session closes at 5:00 am E.S.T.

 

If it is a bullish situation (like this weeks EUR/CAD setup was...) Put a stop under the low of the previous day, and put a target of equal distance. These are not likely to be hit, but they are just your "emergency stop" and "celebration target".

 

Now, hold the trade for 24 hours exactly, and close it out the next day.

 

The odds of closing above yesterdays close is significantly greater than closing below yesterdays close.... and furthermore, because you are trading such a strong market flow, even if your trade loses...it is likely that your losing trades will be somewhat small (losing days in this situation usually end up as small doji like candles, so small losses), and winning days will be much like this example, where you could capture 85-90+ pips.

 

Anyway... what i've just spelled out here WILL WORK. it WILL MAKE A PROFIT. Of course, the "magic" is in knowing what pinbars or engulfing or range expansion breakout candles are "quality", and which ones to ignore due to circumstances in the market (such as, looking to go short a market that just sold of 1000 pips in 5 weeks, and is retesting a yearly low.... etc)

 

I hope this helps...lemme know if it does. Also, if you care to either send a PM, or skype, or post here even more about your trading background and style, i could probably give you a better answer.

UC-daily-aug21st-2012.thumb.png.0aaf863a1ba6bba1d36a71304bf4e848.png

EU-daily-aug21st-2012.thumb.jpg.fc7cc5550c297236497f6410675d243d.jpg

EC-30min-aug22nd-2012.thumb.jpg.a987d8f0a6e7471aa27af7723cdb570f.jpg

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hey all, I'm going to be doing some real intraday "scalping" analysis this coming week. It'll be in some of the various futures markets. going to be using some "market profile" like concepts, as well as some VSA style concepts, and of course good ol' price action, S/R levels, multiple TF analysis, etc.

 

This is going to be geared towards the true "day trader". my average hold time for trades of this sort is around 20-30 minutes, and I might take anywhere from 3 - 6 or even more entries and exits during the first 4 hours of the U.S. open (when both london and the U.S. are trading actively).

 

I may do a bit around the london session, but I plan on focusing primarily on setups that develop or are ready to go come the U.S. session open.

 

And for this, I will likely do a little conference chat and possibly screen sharing via skype. I may do something through anymeeting as a screen sharing service, but for questions, answers, discussions, etc... it will be via skype.

 

So, if your reading this, and your still struggling to make consistent profits, guys, i don't know how to say this any other way... you should drop by.

 

once upon a time, I came across a few good resources for trading that opened doors to various aspects of market analysis that I didn't know existed, and those are the "secrets" that helped me take this into a full time business.

 

I'm "distilling" down a lot of what i've learned into some powerful concepts in which to both understand the markets, and how to quantify that understanding to determine high probability setups.

 

If your not trading full time, but you don't care to check out (for free) what at least one profitable trader does in detail to make money on a regular basis in the markets.... well, i'm really not sure what to say, except... thanks for being a liquidity provider for those of us who do this full time.

 

for those who are interested in watching some live trading and real time trading analysis, send me a PM, or post on this thread that you are interested. I will have a day and time over this coming weekend posted up for those who "RSVP".

 

If you don't post your interest on this thread, or send me a PM, then i'm not going to bother trying to block out a segment of my trading day to give a free chat room webinar on a couple of ways that you can apply to make money in the markets consistently.

 

If I get 4 RSVP's, i'll do it. Otherwise, not. This is for free and fun, so if you want to learn more, RSVP either in this thread or via PM, and lets get ready to do some real trading, and make some pips :)

 

FTX

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Well, ended up making about 0.45% today in spot, and had a few trades in futures as well, though they only made a couple bucks.

 

have a good weekend all. will post up the live trading times this weekend.

 

Please rsvp.

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Closed out the 6A long for a 10 tick profit. Don't like how price keeps stalling at the highs, and I feel a bit overexposed with both a spot forex long, and a futures long...

 

at any rate, 10 ticks is $100 per contract profit... i'll take it

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Well, i'm really not too thrilled with the 6C short, seeing how it's down 13 ticks at the moment... but it looks like it may be running out of steam, and I should be able to get out for a smaller loss, or maybe even a BE....

 

as for the spot forex trades, i'm looking to take profits on the aud/usd long somewhere between 1.0255 and 1.0260. AUD/CAD probably something just shy of 1.0170. usd/cad... still not sure.

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You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake David Rodriguez 11-14 minutes We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Reward to Risk ratios play a vital role in capital preservation Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately. Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair     Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average Profit/Loss per Winning and Losing Trades per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades. Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?         Expected Return Gains Choice A 50% chance to Win 1000 50% chance to Win 0 Expect to win $500 over time   Choice B Win 450   Win $450 Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.         Expected Return Losses Choice A 50% chance to Lose 1000 50% chance to Lose 0 Expect to lose $500 over time   Choice B Lose 450   Lose $450 In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains. It feels “good enough” to make $450 versus $500, but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—500 dollars lost are equivalent to 500 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “reward/risk ratio”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake David Rodriguez 11-14 minutes We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Reward to Risk ratios play a vital role in capital preservation Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately. Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average Profit/Loss per Winning and Losing Trades per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades. Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?         Expected Return Gains Choice A 50% chance to Win 1000 50% chance to Win 0 Expect to win $500 over time   Choice B Win 450   Win $450 Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.         Expected Return Losses Choice A 50% chance to Lose 1000 50% chance to Lose 0 Expect to lose $500 over time   Choice B Lose 450   Lose $450 In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains. It feels “good enough” to make $450 versus $500, but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—500 dollars lost are equivalent to 500 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “reward/risk ratio”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake David Rodriguez 11-14 minutes We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Reward to Risk ratios play a vital role in capital preservation Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately. Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair   Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average Profit/Loss per Winning and Losing Trades per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades. Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?         Expected Return Gains Choice A 50% chance to Win 1000 50% chance to Win 0 Expect to win $500 over time   Choice B Win 450   Win $450 Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.         Expected Return Losses Choice A 50% chance to Lose 1000 50% chance to Lose 0 Expect to lose $500 over time   Choice B Lose 450   Lose $450 In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains. It feels “good enough” to make $450 versus $500, but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—500 dollars lost are equivalent to 500 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “reward/risk ratio”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake David Rodriguez 11-14 minutes We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Reward to Risk ratios play a vital role in capital preservation Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately. Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair   Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average Profit/Loss per Winning and Losing Trades per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades. Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?         Expected Return Gains Choice A 50% chance to Win 1000 50% chance to Win 0 Expect to win $500 over time   Choice B Win 450   Win $450 Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.         Expected Return Losses Choice A 50% chance to Lose 1000 50% chance to Lose 0 Expect to lose $500 over time   Choice B Lose 450   Lose $450 In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains. It feels “good enough” to make $450 versus $500, but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—500 dollars lost are equivalent to 500 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “reward/risk ratio”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. dont forget- like subscribe Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com   Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com   Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com     View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com
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