As a priority, you must always concentrate on your downside risks before considering any potential profits. By doing so, you will ensure that you provide yourself with the optimum chances of Forex survival. For instance, you must stop anticipating that every position that you open will be a winner.
You need to understand that you will have better chances of success if you aim for realistic targets. Otherwise, you could experience drops in your morale and confidence as the result of continuous failures. You are also well-advised to review your Forex objectively regularly to assess that their viability has not been affected by any changing circumstances.
You must always attempt to trade positions that you have analyzed carefully as opposed to responding mindlessly to some hot-tip. If you do attain such information, then you should take your time until you have gain a fuller understanding of the implications of the current market developments. Keep in mind that you are better being out of a position that you wish you were in than being in one that you wish you were out.
If you have already started trading, then you will be acutely aware that Forex carries with it above average risks. Consequently, your best way forward is to design and thoroughly test a trading strategy that incorporates the concepts of risk and money management.
When doing so, remember that one of the main differences between experts and novices is that the former think about how much money they can lose whilst the latter think about how much money they can make. You can understand this concept better by considering the following example.
Image that on a daily trading chart that the RSI is rebounding upwards after just dropping below 30. Many traders would consider this development as a BUY signal. A novice may well open a new long position at this stage but without considering risk and money management concepts fully. Consider that the position achieves a profit of 10 pips even after price temporarily moved against it by 20 pips. After three identical consequent wins, a fourth position is opened and again price progresses against the position by 20 pips. However, this time price drops by a further 30 pips before the novice reacts and closes the trade.
In summary, although the beginner achieved three wins out of four positions, a total loss of 20 pips was registered for this trading sequence. In fact, this is a problem many novices experience in that they manage to win a good proportion of their trades only to still register losses. Something is clearly not right.
In contrast, experts would study the same trading situation but by utilizing their trading strategies that incorporate well-tested risk and money management concepts. Consequently, they are acutely aware that they must make larger profits when they win than the total amount of their losses when they are wrong in order to be profitable over the long haul. They often aim for a profit to loss ratio of at least two to one.
As such, they would trade four similar positions but in such a way that they would incur two losing results registering a total loss of 100 pips, but two wins recording a total profit of 200 pips. Consequently, they would have made a 100 pip profit from this trading series.
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