Forex traders are still looking for the Holy Grail among trading systems and if it hits a series of losing trades, they immediately think about how to improve the trading system, or start thinking about a complete change of trading strategy.
In this article we explain how professional and successful long term traders approach their trading strategies.
Based on our experience, traders often seek extremely complex trading systems, trying to hedge loosing positions, and perhaps all possible combinations, alternatives, and tactics that you can imagine.
For a trader it is important to note that trading on financial markets is ultimately the same as any other business. Principles of business or even just the management of personal finances can also be applied in trading. In trading on financial markets, quite a simple equation applies:
Your earnings - your costs = Your profit / loss
Earnings obviously represent individual profitable trades, then the cost for each trader means losing trades + execution costs of trading orders. No surprise, therefore, that the more we can increase revenues while reducing costs, we achieve higher profits overall.
Therefore, if you are trading with a low quality broker, who is not fair, you will pay a spread together with high slippage, and your costs will increase so much that probably even the very best trading strategy will not be able to exceed it!
It is usually quite difficult to increase profits, and the vast majority of retail traders are trying to build the highest quality trading system, thus increasing profits.
These traders get into a vicious circle of endless searching for the most profitable trading system.
After years of searching, a trader usually returns to trading systems that he probably already knew about at the start of his trading career. Also the trader will pay much more attention to his costs.
Trading costs may be influenced. Firstly, the individual losing trades must be restricted as part of money-management and you have to close unprofitable trades as soon as possible.
Generally among successful traders, it is stated that losing trades is not a failure, but an opportunity to open a profitable trade for better price in the market.
Further, we can affect total costs just by choosing the right broker - reducing the execution costs on individual transactions, which includes the spread and especially slippage. The slippage is the main reason why the same trading strategy achieves different results with different brokers (more information can be found on our Brokers Truth page ). Additional costs can include swaps, the delay in executing orders and more.
What does it all mean? The vast majority of traders are trying only to increase their earnings and they consider their expenses as a fact that cannot be changed.
This is a huge mistake! Conversely, first we should reduce costs as much as possible (choosing the right broker), after that we should try to increase our profits!
How to increase your profits?
On foreign exchange markets, two basic trading principles work in the long-term to achieve profitable results.
- We make more profitable trades (i.e., we have a higher percentage of success than 50%).
- We realize higher profit trades (positive risk reward ratio – RRR).
These two simple principles should be a cornerstone of our trading plan and we should always decide which direction we will take. According to our own experience, there is a problem that hardly any trader can combine both ways to generally realize higher profits than losses.
For this reason, especially for beginners and intermediate traders, we recommend you choose one of the above options, and then stick to it constantly.
Personally, what also turned out useful - we have seen the most profitable traders that consistently keep their trading plan and one of the principles above - to a certain extent they trade like robots, always the same over and over again.
Only in this way you can in fact reveal your possible failures, and constantly improve your trading results.
In the table below you can see the Risk Reward Ratio (RRR), and the percentage of success we achieve with long-term zero results, therefore we Break / Even.
Every time we are able to achieve a higher percentage of profitable trades with the given RRR, or at a given percentage of successful trades achieve better RRR, we realize the long-term profitable results.
The impulse for writing this article was to remind traders who are searching for the most sophisticated trading strategies that in financial markets, fairly simple principles work, and a simple trading strategy most often works the best.
At the same time, an important fact is that we have seen countless traders who have been successful, but still achieved unprofitable results. The reason was simple, there are countless brokers, with which traders simply cannot be profitable.
Why? Because traders pay extremely high costs to low quality brokers including (spreads, commissions, huge slippages, sometimes re-quotes, Stop-Loss hunting, widening the spread, delayed trade execution etc...), so that they can never increase their profits!
And now the most important thing:
That's what forex trading is all about! 98% of retail traders do not realize this fatal truth and are still just trying to increase their profits.
The problem is that they can never increase their profits enough to be able to exceed the losses with (unfortunately) the vast majority of today's brokerage companies (that do not follow fair play guidelines).
What is the best solution? Follow these two simple steps:
1) Find a really good quality (fair) broker where you do not have to pay extremely high costs. However, be careful! Here the equation does not apply: "The lower the spread = the better broker"
2) Build a simple time-tested trading system - entry rules, including trading hours, the rules for the management of opened trades and exit rules and constantly follow these rules. Also determine the only market where you will get a sense and gain experience.
If you follow the information in the article: " 4 steps to start trading profitably ", you will be able to start trading profitably over the long term.