That's the real and ONLY SECRET to Forex Trading. Profitable Forex systems tend to have significantly larger wins than they do losses. The best systems also have high winning percentages where they win 60%+ of the time. You do not need a high winning percentage if your wins are 2x to 3x+ bigger than your losses.
Van Tharp in his book "Trade Your Way to Financial Freedom" uses a concept he calls R Multiples. R = the Risk you take whether in pips or dollars. He suggests traders not take trades that they don't feel will give them many times their risk if the trade works. A trade that makes twice the risk is a 2R trade and one that makes 5x the risk is a 5R trade.
There are many types of Forex Trading Systems but most fit into two categories - Trend Systems and Counter Trend
Most traders trade Trending Systems as trends typically continue and when they do provide sizeable profits. When they don't work out the trader takes a super tiny loss. In our Systems Development we've broken Trend Trading down into the two following methods.
1) Forex Breakout Trading Systems - This is where the trader buys the highs when price breaks out or sells the lows when it breaks previous swing low. Breakout systems have lower winning percentages than pullback systems in our opinion UNLESS the trader waits for consolidation BEFORE taking the breakout trade. What this means is wait for a double top or bottom and then when price breaks out in direction of the trend take it. OR wait for a sideways low volatility pattern or the look of a rectangle. If price goes sideways and doesn't come down then its much safer and much higher winning percentage trade when it does break out. Same as for selling the lows. If price is at the lows and can't bounce but goes sideways for a long time and then breaks down its very likely to explode down.
The reason why sideways breakouts work is as time progresses traders who are on the other side of the trade put their stops right there and when price breaks out their stops get hit causing more buying/selling and thus a profitable trade for you.
2) Pullback Forex Trend Systems - This is my favorite kind of trend system. Trends don't go one way forever and after the momentum is over they tend to pullback. Wait for the pullback's momentum to fail and as price continues in the original direction hop on board! There's two reasons why I feel this is a better trade. First since its pulled back it often will continue up to the previous swing high/low. This gives you a decent profit and if price continues higher/lower than you make a fortune but if not still have locked in a profit MANY TIMES LARGER than what you risked!
If you would like to learn forex trading send us an email at careerdaytrader@yahoo.com and we'll give you access to two weeks of our Forex classes.
Trading foreign exchange on margin carries a high level of risk, and
may not be suitable for all investors. The high degree of leverage can
work against you as well as for you. Before deciding to trade foreign
exchange you should carefully consider your investment objectives,
level of experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your initial investment and
therefore you should not invest money that you cannot afford to lose.
You should be aware of all the risks associated with foreign exchange
trading, and seek advice from an independent financial advisor if you
have any doubts.