When most people start trading Forex, they will jump into a search for a profitable forex trading strategy. They may have picked some strategy up from YouTube, forums, a Forex academy, books or wherever. However, strangely enough, after applying the strategy in live Forex markets with real money, it does not somehow make them profit,…
When most people start trading Forex, they will jump into a search for a profitable forex trading strategy. They may have picked some strategy up from YouTube, forums, a Forex academy, books or wherever. However, strangely enough, after applying the strategy in live Forex markets with real money, it does not somehow make them profit, but ends in a loss. So, what exactly is going wrong here? Why did the strategy that worked for other traders not work for them?
Here is the fact: If you rely blindly on a simple trading strategy that you have learnt, and apply it every single time you see it occurring, the chances are you will end up losing more than you win. If it were that easy to succeed, then everyone would be rich. Anyone can learn a simple moving average crossover strategy, or a double top strategy. Yet if you enter a trade every single time you see a double top, I am certain you will end up losing more than you win overall.
So, what is the answer?
Learn to read the chart!
This is the first thing you should do as a new trader. When you learn how to read a price chart, you will become able to understand why the price is going up, down or sideways. Also, where the price is most likely to head to next.
For example, you see a double top set-up (telling you to sell), but if you read the chart, you can tell that the price is actually trying to break upwards. Therefore, instead of selling, you should be looking for opportunities to buy.
By learning how to read the chart, you can literally reduce your losses by half, because the next time you see a pattern that tells you to sell and, if through chart reading, you sense that the market is trying to head up, you can just skip the sell trade and avoid that loss. And even better, you can then apply the right buy strategy instead.
Use the Correct Risk per Trade
One of the reasons why people blow up their account when they first start trading is a result of using the wrong risk percentage per trade.
Right at the start, you should decide what percentage of your account you are going to risk per trade.
For example, say you have a $1,000 account, and you want to risk 100% per trade. What this means is that (in simple terms) if the trade you enter makes as profit equal to the amount you risked, you will have made 100% profit. So, your $1,000 capital becomes $2,000. Of course, if you lose that first trade, all your capital is gone.
As you can see, risking 100% per trade trade is akin to gambling. This is definitely not the way forward. The game behind the risk percentage is that if it is too big, it is too risky. Yet if it is too small, you might want to overtrade in order to compensate for the overall low return, which could be detrimental to your trading.
The trick is to risk a percentage which is low enough for you to not be afraid to trade, but yet at the same time be high enough to be meaningful to you as a gain. The textbook rule says this is something between 1% to 3% per trade, but of course, trading in real life is nothing like any textbook.
If you have capital of $1,000 and you risk 1% per trade, this means if you lose a trade you will lose $10. This is OK, but if you win, you win $10 as well, if your reward to risk ratio is 1:1. If you have a daily goal, e.g., $100 of profit per day, then you must make 10 winning trades to make that $100. The chances are, because you are forcing yourself to trade more, you will probably end up taking trades that you should not have taken.
So, the rule of the thumb is to consider your trading capital, what you will win per trade, and what you will lose on a trade, by various risk per trade percentages. Settle for what makes sense to you emotionally and is neither too small nor too large.
Apply a Good Reward to Risk Ratio
Why do some traders have more winning than losing trades yet make a net loss overall? It could boil down to them taking small wins but big losses. That does not make sense, does it? But it is often the truth you will see if you look at the trading history of many unprofitable traders.
What is a reward to risk ratio? Well, if your reward to risk ratio is 1:1, it means that the number of pips from your entry price to your stop loss is equivalent to the number of pips from your entry price to your take profit target.
If you have a win rate or 50%, and if your reward to risk ratio is 1:1, then, generally speaking, you are a breakeven trader.
However, if you have the same win rate of 50%, yet your reward to risk ratio is 2:1, then, even if you lose half and win half, you are a winning trader.
If you have capital of $1,000, and your risk percentage per trade is 2%, you will risk $20 on your next trade. So, if you have a reward to risk ratio of 2:1, when you lose, you lose $20, but when you win, you win $40. See the first chart below where the risk is 30 pips and the reward is 60 pips for an illustrated example.
With a win rate of 50%, out of 20 trades, on average you lose 10. Losing $20 multiplied by 10 trades equals $200. However, you won 10 trades at $40, which means you made $400. So even if you won 10 and lost 10 trades, you have still made $200 in net profit.
Next time you trade, ask yourself, what is my reward to risk ratio on this trade?
Use a Proven Trading Strategy
If you are asking how to earn profit in forex trading, know that there is nothing more crucial to this than using a proven trading strategy.
What is a proven strategy? It is a strategy that not only works in the slides or screenshots that you have learnt from, but also one that has been proven to work in the past, year after year.
There will be years where the strategy makes you more money and years where it makes you less. That is normal in the Forex market. But it must be consistently profitable.
You cannot have a strategy that makes you money over one year but where you lose money the next year. You cannot rely on that strategy as you never know whether you are going to be profitable this year or not.
Why is having a proven trading strategy important?
Because there will be weeks where you find yourself losing. Yet if you know that your strategy will make you profitable at the end of each year, you can find the courage to persevere and keep going through the losing streaks.
If you do not understand this, then you will begin to doubt yourself, doubt the strategy, and may just give up, only to realise that had you continued following your trading plan until the end of the year, you would have been profitable.
Back Test, Back Test, Back Test
How do you know if the trading strategy you are using is a proven strategy?
You back test it.
If you are trading with the MetaTrader 4 trading platform, all you simply need to do is to scroll back in time to where you want to start the back test.
Next, press “F12” on your keyboard. This will allow you to go forward bar by bar every time you press the F12 button.
As you scroll through, each time you see the setup, record your wins and losses.
If you are profitable over one year, back test the second year, then the third.
If you are profitable for the last three years, you know you have got yourself a winning strategy.
When you back testing, you will see for yourself that losing streaks are natural and unavoidable. The key lesson is not to panic and not to let it affect your judgement when it happens.
Time Trade Entries Carefully
There might be a group of five traders who spot a similar setup, one that they have learned together from the same coach. However, out of the five traders who entered the trade, maybe only two have made money out from that trade, while the other three have made a loss.
Trader A may enter later than Trader B on the same setup. And because Trader A entered later, the market retraces back a little to hit trader’s A stop loss only to come back in the intended direction and produce a winning trade.
This shows that even if the setup is the same, the timing of an entry is important. If you missed the boat to enter onecandlestick ago and the trade has moved on, then skip that trade – do not chase it.
The entry timing not only affects where your stop loss placement is, it will also affect your reward to risk ratio and how close your take profit target is near to your entry level.
Use a Complete Trading Strategy
When people say that you need to have a trading system, what does this mean?
A proper trading system is not just having a good strategy. It is about the overall game plan and not being overly fixated on an individual trade.
It is about looking at the overall reward to risk ratio of all the trades you are taking. It is about looking at your risk percentage and your win rate.
All these factors will translate into your becoming either a winning trader or a losing trader.
A professional forex trader understands that the game is about more than just having a good strategy.
Keep your Emotions Under Control
Emotions are the number one killer in trading. In poker, there is a term called “tilt”. “Tilt” is when a poker player gets their emotions all messed up and starts playing differently (too aggressively) in an attempt to win back their money.
The same goes for trading, you do not want to be on “tilt” when you make losses. Losses happen and will always happen to some extent – this is part and parcel of trading.
There are many cases of people losing and starting to “revenge trade” as a result. They increase the size of the next trade to try to make up for the earlier loss (this is actually part of the “martingale” money management strategy). Usually, before you know it, the revenge trader has blown their entire trading account.
Remember to treat every trade as a new situation. There should not be any emotional baggage carried forward from one trade to the next.
If you made a loss on the last trade, you might get so demoralized that even when you see a good setup, you let your previous loss influence you and you do not feel confident in taking it – but for no good reason.
The same goes for being overconfident because you won your last trade. Or maybe you had three wins in a row, and you feel like you are unstoppable. When that happens and if you feel that you are on a winning streak you want to take any normal-looking trades even if they are not really part of your strategy or system. But because you feel unbeatable, you start to trade the trades you normally would not touch.
Keep your emotions in check all the time. Any time you feel that you are overconfident, overexcited, or demoralised – feeling the urge to revenge trade and be aggressive – STOP. Take a break until you feel that you have regained your composure.
Win Big, Lose Small
This should be your mantra in trading: win big, lose small.
Take a look at your trading history. Is your average win bigger than your average loss, or is it the other way around?
Think about it this way: if you win with a reward to risk ratio of 1:0.5 most of the time, then you will need two wins to cover one loss. You will need three wins to just be barely profitable.
Does this make sense?
If your trading record does not make sense, it is time to take a fresh look at your trading strategy, your risk-reward ratio, your win rate, etc., and then come up with a game plan designed to make you profitable, and then stick to it no matter what.
Trading is like a business. You may think that having a good product/service is enough. But then you realise you need to make your product known and available, plus all kind of other factors.
This is why every proper business has a CEO and a team below them. There are the salespeople, the marketing, the HR, the logistics, the accounting, etc. The CEO looks at the overall picture and steers the ship in the right direction.
The same goes for trading. You cannot just have a good strategy, or the best risk per trade.
You need to act like a CEO and look at every aspect of your trading, and make sure each factor sticks correctly to the overall trading system. Any time you feel that your emotions are not under control, then stop. Any time you feel that you have the urge to take a sub-optimal trade just because you want to trade without the discipline of your trading plan, stop. Any time you feel that you want to take your profit too early for a small win, stop.
Once you understand the game of trading, you will know when to trade, when to exit, and when to walk away from the table.
How do you profit from Forex trading?
Learn chart reading, have a proven strategy, define your trading system (your game plan) and then stick to it. Once you have that, keep refining it until it is fine-tuned for maximum profit.
What is the average profit in Forex trading?
It depends on how many trading strategies you have and how many trades you take in a month. If you have one proven strategy and that strategy only has five trades a month, compared to a trader who has three proven strategies with 15 trades a month, then the trader with three strategies will make three times more than the first trader. It also depends on the risk per trade and the reward to risk ratio. Generally, an annual return of 20% or even more is quite possible.
Can you make a living from Forex trading?
The simple answer is yes. However, you will need to work hard to master all the trading techniques you will need to trade well enough to make a generally profitable return. Of course, much depends on how much capital you have.
Don’t Have Money to Open a Reasonable Forex Live Account? Don’t Worry
Don’t Have Money to Open a Reasonable Forex Live Account? Don’t Worry
This is one of the questions I am usually asked. There are so many traders who have been learning and practising for several months or even years. Now, they are ready to open a live account and start trading with real money. But the problem is, they don’t have enough money to open a live account with a true ECN/STP broker.
As you know, 0.1 lot is the minimum lot size that true ECN/STP brokerssupport. The reason is that the true and real liquidity providers don’t support smaller lot sizes (micro lots), and, as true ECN/STP brokers are directly connected to liquidity providers, they transfer the orders directly to them, and if the orders lots sizes are lower than what liquidity providers support, they reject the orders.
Therefore, when you want to open a live account with a true ECN/STP broker, your account size has to be large enough to handle the minimum of 0.1 position. For example, if you open a $1000 account, and you locate a trade setup that needs a 100 pips stop loss, then the risk of taking this trade setup will be about $100 which is 10% of your account. Taking a 10% risk is too much, specially when you are a new live Forex trader. If you want to take a 3% risk with this trade setup, then your account balance has to be about $3,400 at least. But the problem is, some traders cannot afford to open a $3,400 account. I know some good and serious traders who have learned and practised enough and are now ready to start live trading, but cannot open even a $500 account.
Before talking about the real solution, I’d like to explain why you should not open a small live account with a true ECN/STP broker. Many of them allow you to open even a $500 account. But as 0.1 lot is the minimum lot size you can take, then you will have to take too much risk, and so, you can easily wipe out your account. Not only you will not be able to grow your small account, but you will easily lose that money. So, it is wasting of money to open a too small account that cannot handle the risk.
This is true that I always say you should start with an as small as possible live account, but I don’t mean a too small account that cannot handle the minimum risk you have to take. Your account has to be as small as possible, but it has to be big enough to handle the minimum possible risk.
The other thing is that, if you see a broker claims to be a true ECN/STP broker, but it offers micro-lots (0.01) too, it can have two meanings:
It is not a true ECN/STP broker and it is market maker.
It has ECN/STP and market maker system at the same time, and they put the small accounts in market maker system, and large accounts on ECN/STP, because it is usually the novice traders who open small accounts and most of them wipe out their accounts very easily. So, the broker wants to earn all the money that small account holders lose.
So, opening a too small account with a false ECN/STP broker, or a true ECN/STP that offers micro-lots is not the solution.
The last thing I’d like to tell you before talking about the real solution is that when you see you cannot open a live account with a reasonable account size with a true ECN/STP broker, you may decide to open a small account with a true ECN/STP, but instead of trading the long time frames that usually need wide stop loss orders, you decided to trade short time frames to have tighter stop losses to risk less. For example, while a 100 pips stop loss equals a 10% risk for a $1000 account, a trade setup with a 30 pips stop loss will have a 3% risk for such an account. And you can locate such trade setups on shorter time frames only. You can never take a position with a 30 pips stop loss on the daily or weekly chart.
Theoretically, trading the shorter time frames looks like a good solution. But it is terrible in reality. Trading the shorter time frames will be nothing but wasting of a lot of time and money. Before you come to this conclusion, you will waste and wipe out several accounts. You will stop trading short time frames after having a terrible back and neck pain (because you have to sit at the computer for several hours per day to trade the short time frames).
So, trading the short time frames is not a good solution. Forget about it: Forex Scalping Facts And Fictions
What if you borrow money from the others, trade with it, and pay it back when you made some profit? What if you ask the others like family members and friends to invest with you and allow you to manage their funds, so that you can open a big account with their money?
That is the most stupid thing a trader can do. Never even think about it. Even if someone, like your wife or parents offered you some money to help you open a big enough live account, you must refuse it immediately. The reason is that trading with the others’ funds creates some different kinds of emotions that prevent you from thinking and deciding properly. Therefore, you will make terrible mistakes and you will lose the money definitely. What will be left for you is the shame that will remain forever. You will feel guilty because of losing the others’ money. Never even think about it. It needs several years of successful and professional live trading to be able to manage the others funds and account. You will have a long way to reach that level. Even, 99.99% of the too professional and experienced traders don’t agree to trade with the others’ funds.
So, forget about this terrible solution too.
What Is the Real Solution?
There is a great and hassle free solution for this small problem. Yes, this is a very small problem from my point of view. It is not even a problem. It is an opportunity. Indeed, you are lucky if you don’t have enough money to open a reasonable live account with a true ECN/STP broker. It is a chance for you to keep on demo trading and mastering your trading system even more.
As long as you don’t have enough money to open a reasonable live account, you should keep on demo trading and practising your trading system, and saving money at the same time. No matter how long it takes. There is no rush. Keep on demo trading and saving money. When you have enough money, you can open a reasonable live account while you have already banked a lot of experience through demo trading. You are much luckier than the others, because you start live trading when you have already mastered your trading system perfectly, whereas many others who have enough money, start live trading when they are not ready for it. So they lose a lot and usually many of them give up on Forex trading.
As you see, sometimes having money is bad luck. Sometimes it is lucky to have no enough money.
All psychologists say that every person needs to know itself and to know his or her own level of patience and anxiety levels, and that practice is a good way to do. But do not abuse it. I think it works in the same way with the Forex demo accounts. Too much demo really sucks and will never prepare you for the real trading. Trading demo too much time won’t make you a better trader but a better loser. Once you know how to use the tools on your trading platform and you have the basis of the trading, close the demo and get on real money. You don’t need six months for that. Think it in this way: if an average human life is 70 years, no one needs more than one single year to learn how to walk. Here are a few tips for you:
Even if you are on real money now, you can still use the demo to test a new strategy (strongly recommend to be your own strategy and not someone else’s) or you can use the demo to test how a new instrument acts. For example when Bitcoin was launched, the demo account was a better choice than the real money account, to see how BTCUSD is trading.
If you like the automatic trading, you can use the demo to test the EA you just bought or maybe build one yourself.
When you start to trade on demo, at least ask your broker to make the demo as big as your future real money account. Is really useful to trade 50000$ on demo while you will only deposit 1000$ when opening the real account.
Even if you trade on a demo account, – meaning simulated market conditions – I suggest making realistic assumptions. Use a margin of one up to five pips when you place your entry, stop losses or take profit orders as in the real market conditions quite often happens to see them executed at a different value than what your set ups – especially for entry orders.
The simulated trading environment does provide a trader with the opportunity to get used to the software he will be using or with his broker’s trading conditions. Use the demo account only for this purpose and do not try to build a reputation by linking the account on websites as www.myfxbook.com or www.fxstats.com because no one cares how good you are on demo.
Least but not the last, try to avoid the demo accounts with unlimited use. If you can’t stop to trade on demo your broker will, by denying you the access to the demo and inviting you to open the real money account.
the Demo accounts are there for you to get started and actually understand if the broker you have chosen is the right one for you. but it is also like when you play a game on your mobile and you play against someone who bought his levels , no matter how good you are his tools will kick your ass every time. forex works much in the same way . in the end you can simulate only so much before it becomes redundant.
The Importance of Demo Trading and Your Demo Account
The Importance of Demo Trading and Your Demo Account
I see that some traders believe that demo trading is not a good practice because you know that you are trading with the demo money, and so you don’t trade with discipline. They believe demo trading causes the novice traders not to learn to trade with discipline, and this will be ended to failure finally. When you know you are not trading with your real money, then you don’t care to lose, and so you can make all the possible mistakes, like taking positions with any trade setup (either weak or strong) you see, taking positions while there is no trade setup, over-trading and… . It will be a disaster if these bad actions become a habit in you.
This is true only when you are not a serious learner and you are practicing Forex just to see what it is. So you open a demo account and you take some positions to see how it works. You don’t care if you lose.
However, when you are serious to become a professional and full time-trader, and when you want to make a living through trading, then you should behave completely different.
Before you open a demo account and start demo trading, first you should learn everything you need to know. I have explained this in details here: Do You Think You Are on The Right Track to Become a Profitable Trader?
First complete your knowledge and then start demo trading. Spend enough time to follow the videos and articles I have listed in the above article. If you start demo trading while you are not ready yet, you will only make yourself confused, frustrated and disappointed. Forex makes money. Do not let your mistakes make you think that you can not make money through Forex.
Now let’s say you have learned everything you need to learn, and now you are ready to gain experience through demo-trading. This is a very important stage that if you don’t pass properly, you will not become successful with live trading.
Aren’t you here to make money through forex trading finally? If the answer is yes, then you should pass all the stages very carefully and patiently, otherwise you will not get any good result. I can not emphasize on this more. It is very important.
Make sure to read the below articles carefully:
How To Become a Successful Forex Trader
Are You Still Looking for the Forex Holy Grail?
Do You Think You Are on The Right Track to Become a Profitable Trader?
There are a few things about demo-trading I have to emphasize on:
1. Take the demo trading as serious as possible. Forget that it is the demo money and nothing happens if you lose. You can blow up your live account as easy as you blow up a demo account. So, when you open a demo account, forget that it is a “demo” account. Treat it as a live account and your real money. Do you like to lose money with your live account so easily? If not, then do not lose with your demo account so easily too.
The discipline you need for Forex trading is something that you have to “build” in yourself. You have to “build” it on your own. And demo-trading is the foundation of your “Discipline Building”. If you trade carelessly with your demo account, you will do the same with your live account too. If you take positions with your demo account while there is no strong trade setup, you will do the same with your live account too. If you over-trade with your demo account, it becomes a habit, and you will do the same with your live account too. If you…
Conversely, if you forget that you are “demo” trading, and you take your demo account as serious as your live account and real money, and you wait for the strong setups only, and you do not over-trade and you don’t take too much risk, and you set the stop loss and target properly, and you care about the losses as you care about losing with your real money, then the discipline you need to have to make money through Forex trading, will be built and matured in you, and you will be successful with your live account definitely.
2. Make sure to keep on demo trading and not to open a live account, as long as you have not been able to repeat your success with your demo account.
Does it make sense to open a live account and trade with the real money while you have not become able to make money with the demo account yet? If it doesn’t make sense, why are you trading with a live account then? You think live trading is different? It is not. When you lose with the demo account, you lose with the live account too. If you are not knowledgeable, experienced and disciplined enough to make profit with the demo account, you will not make profit with the live account too.
You will always have time to open a live account and start live trading. Don’t do it when you are not ready yet.
3. Your demo account size has to be the same as your live account size. I mean if you are supposed to open a $1000 live account in future, then practice with a $1000 demo account too, and do not open a $100,000 demo account for example. This helps you behave with your demo account exactly as your live account. This helps you take your demo account serious.
Keep in your mind that your demo account has to be treated exactly as your live account. Although you open a demo account for free, but it is not “free” in reality. You are spending your time on it. You are building your experience and discipline with it. So not only it is not free, but it is too expensive and valuable. It is the “foundation” of your business.