If you ask the marketing executives at the leading online brokerage firms how many traders make money trading? The honest answer would be not many. In truth, the road to perdition in forex is broad. But the encouraging news is that there is a path to success. The reason why 75 percent of Wall Street’s professional traders make millions is that the market is designed to pay you if you can identify value and exploit it.
What is value? By value, I mean your edge. If you don’t have an advantage, you are as good as dead in the markets. You may as well take your money to Las Vegas and gamble it there, at least you get free drinks and food for your trouble. In fact, the casino will always have the edge over the gambler. That’s the reason why gaming can even exist as a business.
Are you following me so far? Good! Your job is to look at the markets and identify certain tendencies which occur not like clockwork but with a certain degree of predictability. There are many such instances. But before I get into that allow me to delve into an illustration of how you may exploit an edge.
Imagine that you observe that a given currency pair tends to sell off daily at 10:30 AM EST. It doesn’t need to happen every day. Let’s say it happens six times out of every ten trading days. The way to exploit this as a professional trader would be to “lie in wait” every day at 10:30 AM and enter a standard short order anticipating a fall in price as usual. The amount you risk on these trades must be identical. The trade size (monetary value) and pip risk must not vary. At the end of 10 such days, your analysis of your trading results should show six winning trades and four losing trades. The net result is plus two in your favor.tradegbp
If we attach dollar amounts to these trades, for example, if they all represent $1,000. The result would be a $6,000 profit minus a $4,000 loss. Leaving the trader with a net profit of $2,000. That is the way value (an edge) may be identified and exploited. As I said above, there are several instances of value. Many traders just don’t know to look for them.
Some more examples of finding value which will yield profits can be found in the management of your risk-reward ratio around news events, market opening hours and closing hours. You should always be risking less on any trade than the profit you hope to achieve from the transaction. Most professionals work with a 2:1 profit loss, some are less aggressive and manage with 1.5:1 ratio.
With such a ratio and an edge, whether it’s a chart pattern which typically delivers a predictable result (say a 60% win rate), all you need as a trader is to keep executing trades to exploit this edge. The fun and challenging part of the process is spotting value when it reveals itself. That is how the pros make the big bucks and so can you.fxtrade 777