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Building a Better Wheel: Incorporating Profitability Statistics
By James Stanley
New traders entering markets are often looking for the ‘magic bullet,’ that will constantly place pips in their account. Whether it’s a collection of indicators, a trading ‘robot,’ or that ‘can’t miss,’ system, many are looking for the shortest possible route to profitability.
Most will come to find that such holy grails don’t exist. The future is unpredictable, and price is the same – unpredictable; there is no such thing as a crystal ball or a strategy that will always win. Most professional traders embrace this. Most new traders continue to look.
Trading is like many other things in life, where the more we do it, the more experience we gain – the better we can become. We can continue to learn from our mistakes until, eventually, we perform well enough to get what it is that we want. Unfortunately, there are few shortcuts that can get a trader from point A to point D without going through points B and C.
The recent series of articles around Client profitability from DailyFX attempt to show traders that path, by analyzing ACTUAL results of live clients.
This series of articles gives traders the opportunity to learn from the mistakes of other traders, thereby giving traders the opportunity of getting to point D without the necessity of points B and C.
Thus far, three articles have been published in which David Rodriguez, Timothy Shea, and Jeremy Wagner take actual results from live clients, analyzing profitability based on timeframe, leverage, pairs traded and a litany of other statistics, with the goal of giving traders the shortest possible path to gaining that invaluable experience in trading financial markets.
By David Rodriguez and Timothy Shea
“Traders are right more than 50% of the time, but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.”
How to incorporate: When setting risk on a trade, always look for a profit AT LEAST as much as the amount you are risking. So, when entering a trade, if setting a 50 pip stop – look for a minimum of a 50 pip profit.
By David Rodriguez and Tim Shea
“For most forex traders, the best time of day to trade is Asian Hours. European currency pairs such as EUR/USD show the best results.”
How to incorporate: If your schedule is flexible and you can choose when to trade, the Asian trading session may be more accommodating as traders have previously shown a higher propensity for profitability. European currency pairs such as EUR/USD, GBP/USD, and USD/CHF have exhibited the best results for this period.
By David Rodriguez and Timothy Shea
“North American trading hours tend to be the most difficult to trade in due to the high level of volatility in the market. Breakout trading strategies tend to do relatively well in volatile environments, so if you plan to trade during these times, look to trade breakouts.”
How to incorporate: For traders speculating in the most active hours of the FX Market, which can be the most challenging periods of the day to be profitable; look to trade breakouts. The range of volatility during this period can be greater than that of other periods of the day, such as the Asian trading session, and these environments can often be served best by trading breakouts.
By Jeremy Wagner and Timothy Shea
“Research shows that the amount of capital in your trading account can affect your profitability. Traders with at least $5,000 of capital tend to utilize more conservative amounts of leverage. Traders should look to use an effective leverage of 10-to-1 or less.”
How to incorporate: This should be the easiest of the rules to implement. One thing most FX traders know is that leverage can kill an account. The best traders in the world will rarely ever leverage more than 10 times their account value, yet new traders continue to enter the FX market with hopes and dreams of striking it rich by using leverage of 40 or 50 times their account value.
From the research, if you can fund your account with more capital then it could increase your chances of being profitable; but even if you can’t, you can still abide by prudent rules of leverage and money management simply by ensuring that you are never leveraging your account more than 10 times its equity.
It’s still very possible to make eye-popping returns with moderate amounts of leverage. 40 pips a day over 25 days at 10:1 leverage can double a traders’ account. Let’s do the math:
Starting Equity: $10,000
Traded Lot Size: $100,000 (10 X $10,000)
Pip Cost: $10
40 Pips per Day, $10 Per Pip = $400 per day
$400 X 25 trading days = $10,000
100% return in 25 trading days at 10:1 leverage
--- Written by James B. Stanley
To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX.
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Research Referenced in this article: