Have you been wondering how do you profit from Forex trading?
95% of traders lose their money because of bad risk management, greedy, overtrading, lack of knowledge.
With the Forex sitting as a global currency exchange market with a value of almost two trillion dollars, it is certainly understandable that you want a chunk of the profits. This is truly possible when you trade in a responsible and well-informed manner. However, if you do not prepare well and do not commit to planning in regard to the trades that you make, then you will experience the odds being against you and will be upset with the money you lose. Research indicates that two out of three people who engage in Forex trading experience a loss of their money and only a few percent of them really earn money from forex trading. This indicates that there is a need for better caution and more self-education before actively engaging in Forex trading in order to increase the opportunity to make profits in the realm of Forex trading.
How to become profitable in forex?
1. The risk of ruin is not linear in trading. The more money you lose, the harder it is to recover back your losses.
If you trade and make a loss at some moment 10% you will need 11% to recover the loss in the next positions.
If you trade and make a loss at some moment 20% you will need 25% to recover the loss in the next positions.
If you trade and make a loss at some moment 50% you will need 100% to recover the loss in the next positions.
see Table below:
I will repeat this Table a lot of times. This is the most important path to success. This is the difference between retail and pro traders. Pro traders do not have a drawdown in the portfolio above 10%.
When you max risk 1% of the portfolio in one moment you can create a 10% drawdown in the long run and then you need to have 11% gain to recover to break-even.
Retail traders with huge losses and drawdowns like 50% or 30% – can be broke easily because they need a huge amount of percentage to recover their losses.
2. Conduct preparations prior to commencing your trading.
As a trader, you need to have strategy and edge and you need to statistically test that strategy. Using the trading journal you need to see when your strategy gives results and when doesn’t.
My choice is Kelly criterion as a mathematical formula relating to the long-term growth of capital developed by John L. Kelly. I use in each trade to maximize long-term growth.
Mathematically shown in the formula below:
Position size = Winrate – ( 1- Winrate / RRR)
W = 26/50=0.52
R = (780/26)/ (600/24) =1.2
K% = W – [(1 – W) / R]
K% = 0.52- [(1 – 0.52) / 1.2]
K% = 12%
Goal is to compare various systems to see which system has the smallest risk.
Using this number I can compare my strategies, performance – to improve myself as a trader.
Due to the fact that there is much leveraging in the realm of the Forex market, such as even up to fifty to one, this can present a high appeal such as in relation to the purchasing of a lottery ticket. There is a relatively small opportunity to make a large sum of money. However, buying a lottery ticket is not the same, as it is not trading and is gambling. The odds are truly stacked against you in relation to purchasing a lottery ticket.
To enter the Forex market in a better manner, this requires real and careful preparation. It is a good idea to commence with a practice account. This will prove to be risk-free and deeply helpful. As you engage in trading in your practice account, it is advised to read high-quality books about Forex trading. You can readily access such books via Amazon for purchase or you could choose some books from your library as well if you do not wish to pay for such books.
It is wise to apply the information that you have access to from what you read. This will allow you to engage in the decent planning of your trading strategies prior to going full speed ahead with trading. It is advised to stick with your trading strategy instead of changing your plan frequently. The truth is that the more one changes his or her trading strategy plan, the less likely he or she will make a profit. In other words, the Forex trade profit will slip away.
3. Apply diversification.
It cannot be denied that there are some key strategies that should be part of the trading plan of each trader in order to reduce any risks of loss of money. Thus, one great element is to apply the usage of diversification. In order to increase the likelihood of achieving a profit, it is best for traders to conduct a wide number of trades that are small and that are in diverse markets where the direct correlation in regard to the markets tends to be on the low side. Generally, it is a poor decision to place all one’s money toward conducting one large trade. It is also wise to become familiar with methods that will generate a guaranteed profit on orders that are already proven as being profitable. Take into consideration, for example, a trailing stop. In addition, it is wise to realize the importance of applying the usage of the stop and engaging in the usage of limit orders to minimize any financial losses.
So how to become profitable in forex? Do not try to predict the market all the time and chase for money. The trick is position sizing, small risk, preparation for each trade. Wait for the right moment to enter into the trade and always try to create a plan for position exit.