It is true that the trade forex online offers excellent opportunities to grow your money and have a source of passive income. However, one thing is amply clear you must not consider forex trading to be a cakewalk. It’s a road to potential profits but wrong moves can also quickly pave the way to penury in no time. Forex trades can be carried out round-the-clock and traders often make great profits as well as losses through leverage offered by brokers. Bear in mind that forex trading tool is both liquid and volatile so you must proceed with caution.
Trading Strategy
The most common and perhaps the most accurate way to determine the profitability of a strategy is to study its win rate and the risk/reward ratio.
Win Rate
Win rate is the measure of the trades that go in your favor against the total number of trades you conduct. Ideally, your win rate must be at 50% and most day traders manage to keep it at that. The attainable target however is at a modest 55%.
Risk/Reward
The risk/Reward rate is different from the win rate. It indicates the amount of capital that has been put to risk in order to earn profit. Suppose you lose 10 pips on bad trades but also make 15 pips on your winning calls, you’re still making more than what you lost. So even if you win, or get 50% of your trades right, you can still earn a decent profit. While a higher win rate allows you more flexibility in risk/reward, if the latter is high you would still be earning profits despite the dip in win rate.
Excessive leverage
In forex trading, losses are generally not a result of rapid price fluctuations. Price movements are usually not so drastic. For instance, the Euro may move from 1.20 to 1.10 against the USD within five days but the change remains under 10%. It is the high leverages that forex brokers offer that go on to magnify losses as much as they can potentially increase gains. Even though regulators are trying to combat this risk factor, it still remains the biggest troublemaker in the forex market.
Risk Management
Risk management is a key aspect of forex trading that every forex trader must master in order to stay profitable consistently. When you’re just starting, it is best to keep your risk per trade at the bare minimum of 1% or even less. To put this into perspective, should you spend $1000 in a trade, you shouldn’t risk more than $10 in it. You never know when these small losses become a major threat. To tackle potential losses, you should make it a practice to put stop-loss orders in place.
Platform or System Malfunction
Things that are beyond your control can often prove to be very detrimental in forex trading hours. Consider a situation where you’ve placed your bets on a big position that doesn’t seem to be going in your favor. All indicators imply that the trade must be closed but you’re not able to do so because the platform or system has an error. This could be because of a power cut or excessive traffic on the internet but the impact of this might be highly unsavory.
