I'll get right to it...this post from Bill Poulos from Profits Run is excellent! We've all been in this situation, where we look for a great methodology for our trading style, look at published winning percentages, and then cry when it completely blows up your account...yes we've ALL been there! In Bill's new article he helps you figure out the solutions. Bill's expertise really comes through in this article and he's just released his “Risk Eraser” technique video so check it out today!
While doing research on the current state of the Forex trading landscape, I discovered something surprising.
Losing Forex traders appear to be enamored with 'winning percentages' when selecting a forex trading method.
The irony in that statement should be obvious -- if the 'winning percentage' of the forex method is so important, how can these traders still be net losers?
Because, I believe, winning percentage is the wrong concept to focus on. In fact, I find winning forex traders look for methods that have winning percentages closer to 50-60%. And, they also have one more 'secret' that losing traders DON'T have.
The difference will probably surprise you - and it's a big difference, too. The answer should have been obvious, but it isn't for most traders.
Ask yourself this question: How is it possible that a forex trading method that wins 80% or more of the time can end up a net loser?
Losing trades. BIG losing trades. Here's what I've discoveredmany of those methods (or robots) that claim 85% or 97.7% winning trades aren't telling forex traders:
When their systems 'win', they are making a lot of very small gains.
But when their systems 'lose'? They wipe out all of the gains and a good percentage of the trader's account balance, too.
Still, traders flock to these methods because, after all, something winning 'almost' 100% of the time must be good, right? Not really, no.
See, what most traders don't get is that the reward to risk ratio in those high win percentage methods is upside down. Traders are risking way too much capital for way too little profit potential.
That's poor risk management and can easily lead to one becoming a 'losing' trader.
Let me illustrate an example, using a 'typical' Robot trader, making 5 trades:
Trade 1 - gains 8 pips on 20 mini lots (+ $160)
Trade 2 - gains 8 pips on 20 mini lots (+ $160)
Trade 3 - gains 8 pips on 20 mini lots (+ $160)
Trade 4 - loses 80 pips on 20 mini lots (- $1,600)
Trade 5 - gains 8 pips on 20 mini lots (+ $160)
This is standard practice for automated systems/methods out there that don't employ smart risk management. They set stop losses that are far too wide given the reward ratio. Here it's 10:1 (risking $10 to win $1 - does that make sense?)
Say you had a starting account balance of $10,000 -- at the conclusion of these 5 trades, your account balance would be $9,040.
That's a 9.6% loss even though you 'won' 80% of your trades!
We haven't factored in lot or position size yet, either. I would expect it to be a given that the trader above is taking on far too much risk. Keep in mind, too, that trading with an automated or robot method, you are unlikely to be able to stop that 80 pip loss unless you happen to be watching it unfold.
Of course, that robot is supposed to make you money 'while you sleep' - isn't it?
The bottom line is if you aren't managing risk in every single trade, from determining the correct lot and position size to the right points for your stop losses and your exit strategies, you will NEVER join the elite 5% of successful Forex traders.
Let's illustrate a 'winning' trader using a Forex trading method (not a robot), who only wins on 60% of their trades, and see if you note right away what their 'secret' is:
Trade 1 - gains 43 pips on 10 mini lots (+ $430)
Trade 2 - loses 30 pips on 10 mini lots (- $300)
Trade 3 - gains 29 pips on 10 mini lots (+ $290)
Trade 4 - gains 19 pips on 10 mini lots (+ $190)
Trade 5 - gains zero pips on 10 mini lots (+$0)
Again with a starting account balance of $10,000 -- this trader would have made a 6.1% gain ($610 net), as opposed to the first trader's nearly 10% loss.
Yet, this trader only 'won' 60% of the time? What happened?
This trader 'broke even' on 1 of the 5 trades. No gain. No loss.
What the 'winning' trader does is eliminate risk as quickly as possible, thereby ensuring infinite reward (until they liquidate their position). To do this, these traders take aggressive action to move their initial stop losses up to the break even point from the outset of a trade, set an initial profit target and, once they are able to eliminate the risk side in the trade, they will manage the profit side of the trade by scaling out in stages at predetermined profit points.
In this way, once the trader has been able to 'erase' the risk side, they can focus solely on the profit side - with the worst case scenario being a 'zero' gain trade (or, break even).
Now you may not be able to eliminate risk in every single trade; but breaking even on just 1 in every 5 trades can have a significant and positive impact on your account balance.
So, don't let yourself be fixated on the 'winning' percentage of a trading method. As you've just seen, that doesn't guarantee you can be a net winner. Instead, put risk first and profit second. I think you'll be surprised at the results.
For more examples of how to eliminate risk in your Forex trades, I invite you to watch a recent video series Bill did on 'erasing risk'.
See the training videos here “Risk Eraser” technique video