This post is part of the free beginners Forex course
Success in Forex trading depends largely on strategy, but strategy alone will not make you a profitable trader. Successful Forex trading requires discipline and risk management in addition to a sound, time-tested strategy. As a Forex trader, it is essential that you develop a strong strategy that is mathematically sound to provide you with the statistical winning edge. By doing so, you will be working towards a profitable trading system.
In essence, with a strong trading strategy you can lose 40% of the time and still be a long-term profitable trader. By executing high probability trades using a favorable risk-to-reward ratio as well as proper risk management, you can develop your own profitable trading strategy. If the above factors are learned and followed correctly, this could lead to consistent long-term profits.
The main criteria of a successful Forex trading strategy
- Executing High Probability Trades;
- Reducing Further Risk;
- Risk of Failure Chart,
Executing High Probability Trades
By using price action setups we are able to determine the directional bias of the market and what the market is communicating to us on any time-frame, instrument, or environment. In other words, we can find highly probability trades using price action to determine where the Agents of the Fed are on the charts and trade with them (and not against them). Agents of the Fed have billions in equity and are the primary movers of the market. (The concept of price action setups, as well as how to spot Agents of the Fed, are discussed in great length in our Advanced Members Course.) In the end, knowing which clues to look for on the charts will greatly help your odds of making a winning trade.
Waiting for high probability trade setups to appear on the screen will require quite the mental discipline as there will be times when there will simply be nothing worth trading. Get caught up in anxiety or the “thrill” of trading and you will only succeed in hurting your account equity. It is actually quite fine to have no trades open. Know that over-trading is probably the one thing that most amateur traders do–and the outcome is almost always negative.
The method used in this course involves waiting for good signals on the day- and 4hr-charts. When high probability trades are spotted on the charts, we then usually use the “set-and-forget” style of trading. This involves a lot less screen time and is very helpful for those who have limited time to look at the markets. We use limit orders to apply our entry, stop loss, and target criteria. In addition to executing a high probability trade these three orders have to make mathematical sense, as we will now explore.
Using a Risk-to-Reward Ratio
You should never risk more than what you hope to receive in return. For example, if you risk $1 on a trade, then the minimum reward should be $2. In other words, implementing a 2:1 risk-to-reward ratio on your trades helps ensure your long-term survival in the markets. By doing so, you would need 2 consecutive losing trades to wipe out 1 winning trade.
The distance between entry order and stop loss will be half the distance between the entry and take profit order (target). These orders are best placed in areas were it makes logical sense (where there is a high probability the trade will move in your direction). What I mean is that in order for your trade to be taken out for a loss, it must go through a rather tough time. You want the market to work for you and, as such, your stop loss orders should be placed accordingly to these key areas.
Trades that are executed with small stop losses could have an easier time attaining their 2:1 targets; in fact, they increase the potential for even higher, more profitable, ratios. On the flip side, having a tight stop loss also means less flexibility for a trade moving against you. It would make no sense to be trading only to get stopped out of every trade. Therefore, as mentioned above, your stop loss orders need to be placed in critical areas.
Reducing Further Risk
Even before making money in the markets you must learn how not to lose money. For instance, if you lose 50% of your account, it will be required to double your account to bring it back to your original amount. Having a 2% risk per trade is ideal and should always be used (i.e. with a $1,000 account, you do not want to risk more than $20 on any given trade). (Refer to the “Forex Math” chapter for more on trading risk.)
By following money management principles and executing high probability trades, you will create a rule-based trading plan that will ensure you stay on the right path. In order to continue down the right path and keep your risk in check, I highly suggest using a trading log, where all your trades are entered and recorded for future use and analysis. Using a log will help keep your discipline in line with your expectations!
Risk of Failure Chart
A mathematically-proven and sound Forex strategy must involve some form of statistics. I have provided below the % risk of account failure when 1% risk is used per trade which will show you how sound your trading strategy actually is. At the end of every week, as you analyze your trades, you should also determine if you are implementing a sound strategy by using the table below. If you are consistently in the “green” quadrants, your Forex strategy is mathematically designed to make you money.
There are many points to consider when building a successful trading strategy. However, no matter how strong your trading model is, if you do not have the right mindset, you will never be successful. Having the right mindset means thinking critically and not emotionally.