Friday, September 19, 2014

What Is Wrong With My Forex Strategy

March 23, 2012 by  
Filed under Forex FAQ


In today forex faq, we have a question from one of our fellow traders.

Below is the question:

I have been trading about 3 months to 4 month So far I have not made any profit.. Actually i have lost about $1000 USD. I use the MACD indicator, moving average time series and stochastic . I am a day trader and also sometimes a scalper. What am I doing wrong? Please Help!

First of all, I must say that you are making a big mistake. You are trading LIVE account with your hard earn money without a reliable forex strategy. You should trade with a demo account first until you are able to produce consecutive profitable months before moving to live trading.

I can understand the anxiety of most of you who wants to make money from trading fast. However it is this exact anxiety that is costing you your hard earn money. Trading forex is not as simple as what most advertisement made it to be. It requires you to have a reliable forex strategy, the ability to execute it without mistakes as well as the patience to wait for the setup.

As for what is wrong with your strategy, I am unable to tell you as I do not know how you enter your trade and how you exit them. My personal suggestion for you now is to stop trading live and move to demo account first.

With the demo account, you should monitor the winning percentage of your strategy. You should record down the number of wins and number of loses that you have made in your demo account. A decent strategy should have a 60% to 70% winning percentage.

If your forex strategy has at least 60% winning percentage, you should now look into the risk reward ratio. You should record down the number of pips that you usually lose in a trade and the profit that you take from a successful trade.

For example:

I enter a trade with 30 pips stop loss (Risk) and take profit at 90 pips (Reward), I will have a risk reward ratio of 1:3.

A decent risk reward ratio is anything more than 1:2

If your strategy does not have a risk reward ratio of at least 1:2, you should start to look for another one.

The key to successful trading lies in the risk reward ratio followed by the winning percentage. With a high risk reward ratio, you can afford to have a low winning percentage.

For example:

If you trade with a stratgy with risk reward of 1:4 and have a winning percentage of 30%. This means that you are only winning 3 out of 10 trades.

Let says that you place a stop loss of 20 pips per trade and profit at 80 pips.

3 wins = 3 x 80 = 240 pips
7 loses = 7 x 20 = 140 pips

You are still winning 100 pips despite losing most of your trades.

Now you understand the power of risk reward ratio?

In fact, all professional traders rely on high risk reward ratio to make money. Imagine you have a risk reward of 1:4 and the strategy has a winning percentage of 60 to 70%, you are going to make a lot of money from it.

I hope that I have answered your question and if you guys have anything to share regarding this question, do feel free to give your comments below.

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Comments

7 Responses to “What Is Wrong With My Forex Strategy”
  1. Ali says:

    Hi Kelvin
    I’m using 1:3 but 1 for profit and 3 for loss for long time!!!!!
    but the important is the success probablity of my strategy is more than 90%,
    I mean in 90% of my trades I take 10pips profit befor reach to -30 pips,
    my target is +10 pips per day,
    so when I loss -30pips at the first trade I’m going to make it less or zero if my strategy for same day allowed me.
    so whats your idea about this case.

    thanks and regards

    • Kelvin says:

      Hi Ali

      Based on your information, your strategy has 90% accuracy but with a very poor risk reward ratio.

      If you are able to get 90% accuracy, you can definitely trade with this strategy but I believe that the profit level is very low. As a whole, you will not make much every month as 1 lost will cancel out 3 wins.

  2. Julian says:

    Hello Kelvin,

    Nice thread and lots of valuable information. My question has to do with the risk reward suggestion of at least 1:2, although 1:3 or 1:4 even better of course. First of all, I couldn’t agree more that at least a 1:2 – 1:3 risk/reward ratio is ideal, but in my experience this is directly and proportionally linked with having found and using a strategy that produces such results. Identifying and effectively executing trades that can produce a 75-100 pips is not easy task (I’m constantly on the hunt for such set-ups but the market can be so finicky that I end up exiting prematurely before the entire 75-100 pips move) and this has somewhat forced me to become more of a scalper than anything else, maybe an occasional medium term trader at best.

    I guess my question is : How can I base my trading on a 1:3 risk reward ratio when I’m only occasionally able to catch the larger moves? I’m aware that in order to address the problem I’d have to make my trading decisions on what the daily, 8H, 4H timeframes are indicating, but I have also found that TIMING the beginning of these moves or when they occur at all is not a walk in the park either ;-) Sometimes I’ve been looking at what looks like a good set-up for days before they actually get in their way. In this waiting mode they’ve sometimes gone against me for 50+ pips…. Anyway, I hope my explanation establishes a good background on my experience with this issue.

    Thanks again Kelvin for all the great trading info and tutorials, anything you could share in regards to my question will be highly appreciated.

    Best,
    Julian

    P.S (Meanwhile I just subscribed to your newsletter and I’m looking forward to downloading the first chapter of one of your books)

  3. tom says:

    yeah,awesome graeme!

  4. Irwin Godin says:

    You did that new trader a magnificent job in helping him get on the right track. While the info you gave him is second nature to most of us, you undoubtedly saved him from $$ disaster or from quitting. You have my respect.

  5. Graeme Little says:

    Firstly, I fully understand your frustration but seriously you need to be realistic.
    I have been trading 3 years while working full time so that is the first obstacle to overcome. Not only finding a viable strategy or set of rules but one which you can fit into your busy family and work schedule.

    I’m not sure you realize yet but the vast majority of people have a great psychological problem with following a set of rules. It’s quite often not the rules that are at fault but your ability to follow them for the good and bad times.
    I agree with Kelvin, that you need to test your system until you are 100% convinced that this will make you money. That is, it is statistically a viable method. A demo account is fine for that although once you move onto real money most people find it a whole lot different mentally and why this happens is a vast topic which you will need to address before you are successful.
    What I used to do to bridge that gap was to trade a micro account of $500 at 10c/pip. I traded my system for 6 months and I had made 13,000 pips profit. So if you lose a trade for 50 pips, you lose $5. It doesn’t break your heart but it is at least a taste for losing real money and let’s face it, who likes to lose money. I used to look at a $5 loss like it was $500 but the small numbers allowed me to keep making mistakes while I was learning.
    Any system has a losing component of approx 30% or more which is an acceptable risk but if you see 50 pips lose $500 on one trade it is a whole different feeling than losing $5. I think it is better to grow into your trading 10c at a time and meanwhile build up your belief in your system and in yourself.

    Let’s face it, if your system ends up losing 1000 pips would you rather lose $100 or $10,000 to find out the system doesn’t fit your style of trading or your personality.

    I have recently retired from my job early at 55yo so that I can trade full-time and I have to say that trading offers the greatest rewards possible with money and freedom BUT it is also the most challenging thing I have ever attempted as I am still overcoming the psychological challenges that trading will expose in every person.

    In a nutshell we spend our lives learning to feel secure. We secure our future by getting a job to have a secure income. We buy a house for safety and security for our family. We develop a life of routine in which we are quite certain of what the next day will bring. It is this seeking of certainty that helps us to feel safe.

    Now, you decide to become a trader and enter the Forex Market. You have just stepped into the most uncertain environment you could possibly find. It is this lack of control over your environment that scares the hell out of most people. What trade rules worked yesterday, create losses today. You assume the rules are flawed because they have failed and so you seek another set of rules more robust and more secure, only this search is endless because the randomness of the market especially in the very short term of hours is simply that, random.

    This inability to control the market or predict it, creates fear because we are not taught to embrace uncertainty as we grow up and so this fear comes from your very deep subconcious and it is the reason why most people have a run of winning trades and then for no logical reason they make a sudden emotional decision, break their rules and wipe out most of their account in one trade, of course not wanting to admit they were so stupid, they hang onto the bad decision until it is too late.

    Following your trading rules doesn’t mean for a few trades or until you find a new better system in your inbox for free, it means you have to display the discipline to stick with your system until you have statistically proven that it will or will not yield a profitable result over an extended period of time.
    The only way to overcome the uncertainty of the market is to accept it’s uncertainty and deal with that by acepting that you will have losses as part of being a trader. It is statistically a fact that 30% or more trades will lose, no matter how clever you think you are in reading the price action, no matter how patient you are, it is just a fact.

    One final thought is to advise you to stop trying to scalp the market for fast bucks. The market and the brokers will eat you up and you will just be gambling. You are taking the uncertainty headon and you will lose, especially if you look at it over a decent period of time. Sure, you can have a good week scalping but can you have a good year scalping? I don’t know of anyone who makes a living off trading a M5 chart. It’s possible of course but it is a really hard way to make money trading.

    Kelvin has been a fantastic example to me and I can say completely in an unbiased way that you should listen to him and learn the basic trading concepts, then develop good habits based around discipline and overcoming the psychological challenges that success brings.

    I hope I have given you a few ideas to think about and I wish you well in your trading life.

    Graeme

    • Kelvin says:

      Hi Graeme

      What an advice! You have give the readers here a great lesson. I am very happy to hear someone here in this blog who are trading full time. Like what you have say, discipline to stick to the plan is the most important thing for a trader. Really appreciate your input as you have made this post a better one.

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