How to become a profitable Forex trader
One of the biggest problems I see when analysing my students, is that many of them have an issue in accepting that in order to become successful they need to be ready to accept that they will normally win – in percentage terms – less than they lose.
What do I mean by this? In order to explain, let’s take an example and I will walk you through things step by step.
Most professional fund managers have a winning percentage rate of around 40% and as a result a losing rate of 60%. I am taking about fund managers who are responsible for trading hundreds of billions of other people’s money and who are for the most part trend followers.
For most other traders, especially private retail traders, such a low winning percentage is an issue, as they feel very uncomfortable with a method which loses more than it wins.
The reason for this is psychological and stems from the fact that as humans, we are programmed to want to win more often than they lose. Everyone is told they have to be winner !
From our earliest days in school and during childhood, there is competition to be the best, to get the highest marks and the highest percentage in our tests. This stays with us for life and a winner who wins just 40% of the time, is to most people a ‘loser’, even though he might actually be making money.
The investment business works – as I will show you – in a very different way.
Because of the way markets work, it is not possible or very unlikely to be able to obtain:
- A high winning percentage with a low risk to reward ratio
Which is what most traders are looking for. However, most high winning percentage trading methods come hand in hand with a low profit margin and high cost losing trades. Typically they might have winners in the high seventy percent region, but the odd losers which come in, can and frequently do have the possibility of causing losses which not only cause the trader some pain, but can potentially wipe the account out.
- A lower winning percentage rate but with a much bigger reward ratio is ultimately easier and more profitable for the trader.
Now let us have a look at some trading ideas which could put us in the group of profitable FX traders and enable us to put some green pips in our pip bag.
As many of you will know I am a price action trader and do not use indicators in my daily trading, preferring only to look at candle stick charts. So how can we use price action to create a profitable trading idea ?
One of the first things to consider about Financial Markets and properly understand, is that they behave in a very different way to other ‘markets’ which you might be aware of and this is such an important point we will discuss it now.
An example of the difference between financial and other markets can be seen if we consider the purchase of a TV set from your local electronics dealer, obviously in this case, you will be trying to buy the TV as cheaply as possible. This makes good financial sense, nobody wants to spend more money on a n item than they need to.
However, if you dig a little deeper and ask if there any other reasons for trying to buy cheaply, you will find that one of them, unsurprisingly will be that the TV is for use as a TV and not an investment vehicle.
Now I am not saying that you cannot or should not resell a TV if you buy it cheaply and fancy making some extra money, that would be your own personal choice, it is just that in a market where resale is not the principal objective, people will cheaply as possible
There are several reasons for this, one of which is the size of the investment another is indeed the question of resale.
For example, a house, which is both an expensive item and something which will be probably sold at a later date, will be bought by most people on a rising market. The sums of money involved are large plus the fact most purchasers are leveraged, i.e. they have a bank loan, will cause purchasers to be extra vigilant with their money and choose their purchases wisely.
Additionally, as we have seen worldwide in the numerous house purchase bubbles that have been widely publicised, purchasers more often than not pile into a housing market when prices are already high – market has been rising for some time – as opposed to waiting for prices to cool off. Getting on that ‘ladder’ seems to be something people are prepared to do at any cost.
So what is going on here. Buy a TV and it has to be cheap, buy a house and it has to be expensive. So how can we relate all this to FX trading?
It will come as no surprise that with regard to financial markets as already mentioned above we need to buy high and sell even higher.