What is winning in Forex?
What is winning in Forex? What realistic profits can a beginner expect? A Lamborghini in 5 years?
This lesson 3 of crash course Forex is about how to win in Forex and it is about giving some insights and tips about winning. Most beginners expect to get rich quickly with Forex trading, but sooner or later they come back to that. But what are the realistic Forex profits you can expect actually?
What profit to expect?
There are no official numbers about it. But there is something to say about it. From all the forums, courses trading rooms, etc that I have visited/attended a following scenario appears to be ‘likely‘.
In the first 1-3 years the beginning trader will win nothing, but will lose instead, maybe even a lot of money. Most beginners drop out for that reason.
After another 1-3 years the trader knows what Forex trading is about, becomes finally profitable and may get a 2-4% monthly.
In the next 1-3 years the trader does better and better. The results improve and a 3-8% monthly may be possible.
These percentages are all monthly averaged. Losing is still possible. Even the best traders have losing months now and then. But on average all months will be winning months.
A 5% per month does not sound much. It’s only $150 monthly on a $3,000 account.
But wait.. there is another effect at work and it works in the background: the power of compounding.
Real profit in Forex trading does not come from the monthly 5% returns. It comes through the force that Einstein called the 8th wonder of the world: compound interest, or compound gains.
The power of compounding is at work if you reinvest your profit over and over again. Or in other words, if you just leave your profits on your trading account and don’t take them away.
Compounded gains is simply put NOT 12 x 5% = 60% per year. It is about 80% per year.
Let’s illustrate what this effect does with a small $3,000 account and a 5% monthly return. We use an online compound gains calculator for it.
As you can see in below image, in 10 years of time (120 months) the $3,000 has grown to over a million!
So a Lamborghini in 5 years? Is that possible? Well, check the compounding calculator! The cheapest Lamborghini is $199,805 (Lamborghini Huracan LP580-2).
Protect your account
But how to win in Forex? How to get that 5% monthly?
As explained in the previous lesson, the main thing is to trade a strategy and to trade it consistently. A strong trading mindset will help with that.
The second thing is knowing that winning is not only winning, but also not losing.
The legendary investor Warren Buffett’s famous saying…
…..does not only apply to investing, but also to Forex Trading.
Therefore the following tips:
Tip1: Keep the risk per trade small: 1%
When you are trading a strategy, then you are going to have your winners and your losers.
Losers, especially a couple of losers in a row, lead to account drawdowns. Of course drawdowns are normal, but sometimes they can be that huge that it may take months to recover from them. That’s very demotivating in trading.
The best way to avoid big drawdowns is by never risking more than a small part of your account per trade, so that if you lose, then you will lose a little.
Most pro’s never risk more than as little as 1% of their account for a single trade, and sometimes even less than that.
Of course, with a small risk the profits will be small to, making it hard to recover from even small drawdowns as well. But there’s a fix for that too: keeping a positive reward to risk ratio.
Tip2: Go for a reward/ risk larger than 1
The reward to risk ratio of a trade is the profit you will get if you win the trade divided by the loss if you lose it. So if you can win $2 and lose $1, then the reward to risk ratio is $2/$1 = 2.
A reward to risk greater than 1 is called a positive reward to risk: your potential profit is greater than your potential loss. A negative reward to risk means that the ratio is less than 1: your potential loss is greater than the potential profit.
If you have experienced a couple of losers in a row (a losing streak), then it will be harder to recover from that loss if you trade negative reward/risk trades.
Example: If you trade with a reward to risk of 0.5 and you lose 2 trades, then you will need 4 winners to recover. But if you trade with a reward/risk of 2 then you will only need 1 winner to fully recover.
So if you want to recover from drawdowns easier, it is strongly recommended to trade a strategy with a positive reward to risk.
Know your strategy!
Trading is an emotional business. The emotions that will come up to play are so common, that there are even given names to the effect they cause.
Trading emotions tempt traders to trade off-strategy. They make them take trades, when they should not as per the strategy’s ruleset. And conversely, they don’t let them take trades when they should take them.
Trading, when you should not.
Revenge-trading is immediately placing a new trade after the previous one ended at a loss. The trader is pissed because the trade ended at a loss, and now the trader wants the money back just lost. This is revenge-trading.
Over-trading is closely related to revenge-trading. Over-trading is placing way too many trades in an attempt to recover from loss quickly.
Fear of missing out (FOMO) is the opposite of fear of losing. Now the trader is not scared, but too reckless. An example is when a market is trending and the trader hasn’t jumped in. Driven by greed, the trader doesn’t want to miss out the rally, and so the trader jumps in recklessly. The trader is too late and the market may reverse as soon as the trader has entered.
Boredom-trading (also called random-trading or gamble-trading). Trading can be too boring sometimes and placing a trade just to fix that is called boredom-trading, random-trading or gamble-trading. Boredom trading will bring fun in the game, but it will never lead to lasting profits. The profit you will win today, you will lose again tomorrow plus a bit more.
Fear of leaving money on the table is another example of FOMO. It is the fear that the market will continue to move in the direction of the trade, after hitting the original profit target. The idea that the trader could have made more money later on is intolerable. So driven by greed, the trader does not close the trade as per the rule set of the strategy, but let it run instead.
Not taking trades, when you should
Fear of losing comes into play after a couple of losers in a row. The trader expects that the next trade will also end at a loss, like all the others, and he doesn’t dare to place a trade anymore.
Closing a running trade early instead of letting it run to its profit target, out of fear of losing its unrealized profit, is another example of fear of losing. Again the trader risks not getting the badly needed winners, because he does not trade anymore.
The right way: taking trades when you should
Know your strategy! If you clearly defined the ruleset of your strategy’s you are stronger against those emotions that stop you form trader, or tempt you to trade off-strategy.
Remember from the previous lesson that a strategy needs to be traded a 100% correctly otherwise its outcome becomes uncertain.
A very recommended book about this is the best-seller book Trading in the Zone by Mark Douglas.
Douglas analyses why most traders are consistently losing. And he gives a fix for that also. It is not the strategy that will make or break you as a trader, but your own mindset, and you are in control of that yourself. Great traders are made, not born, is the underlying message of the book.
To me this is the best book about trading ever, and it very much improved my own trading. Worth to read it a couple of times!