Most Traders Fail Because of This...
There are so many good traders out there. With the technology we have now, it is so much easier to learn and make money from trading than ever before. Trader's technical and fundamental analyses are pretty good too. Data from a major Forex broker shows that traders are actually correct more than 50% of the time!
The chart above shows the result of over 12 million real trades taken by clients from a major Forex broker worldwide in 2009 and 2010. These are the 15 most popular pairs that clients trade. Trading AUDNZD pair for example, clients were profitable astonishingly on 71% of their trades and lost 29% of their trades!
Now you are wondering, if traders are correct more than 50% of the time, why do they still lose money?? Good question.
Take a look at the chart below.
The red bar shows the average number of pips lost in losing trades while blue bar shows the average number of pips in winning trades. So we can clearly see that why traders lose money even though they are right more than half the time. Traders lose a lot more money on their losing ones than they make on their winning ones!
From the first chart, we can see that traders are correct 59% of the time on AUDUSD pair but traders lose on average 96 pips while profits were on average 47 pips. They lost twice as much on their losing trades! If you see it from a risk to reward point of view, they were risking $2 to make $1. A very poor way to trade. So basically, it's either traders do not have a good risk to reward ratio OR they take small profits (usually out of fear) and take big losses.
1. Traders do not have a good risk to reward ratio.
Traders are correct more than 50% of the time, so technically with 1:1 risk to reward ratio, they should make money. So what we need to do is to make sure that we have AT LEAST 1:1 risk to reward ratio. This means you risk $1 to make $1. In terms of pips, you risk, let's say, 50 pips to get 50 pips.
Conclusion : The data says it all. We know that our technical or fundamental analyses are pretty good. We just have to make sure our trading systems allow us to have at least 1:1 risk to reward ratio AND STICK WITH IT!
2. Because of fear, traders take small profits but take big losses.
Alright, here is the thing : you may have a good trading system with at least 1:1 risk to reward ratio. But ask yourself, do you really implement it in your trading?
Our emotional side plays a big part in our trading decisions. Fear is one of the biggest problem we have when we are trading. Due to a fear of losing money, we OFTEN take small profits just because we fear the profit will be gone. We fear the trade won't hit our profit target so we have to take the profit as soon as possible. These may make you feel better but in the long run, you WILL not be profitable.
What is the point of setting up a profit target if you will not let the price hit it?
Conclusion : Let your trade play out! Give time for the price to move and wait for it to either hit your profit target or stop loss. Do not monitor your trade every minute. If you have put a stop loss and a profit target, then everything is good. For me, I rather wait for the price to hit my stop loss rather than taking small profits. Because I know how important it is to have a good risk to reward ratio, then I have to really implement it in my trading. So guys, be patient. Wait for the trade to play out.
I cannot express how important it is to have a good risk to reward ratio and REALLY implement it in your trading. The data has shown it all.
I really hope you can learn from this article and become a better trader. Good luck, happy trading!
Rico Ferdinand Yapotra