DailyFX Tips & Picks: Why traders should lose gracefully but win with style
FXCM data shows that the average trader is right 60 per cent of the time. So why is it that some traders struggle? Analysing 12m actual trades by retail investors, we know that the number one reason for the average trader’s difficulties is a tendency to do the opposite of common wisdom. Losses will be two times average gains so, even if the trader is profitable the majority of the time, he or she will fall deeper into the pit every time a trade is placed.
Enforcing a positive risk-reward ratio before placing a trade is therefore hugely important. This means that, if the potential loss of a position is 50 pips, then you should make sure that it’s reasonable to gain at least 50 pips on the position, or preferably 100 pips. By enforcing a risk-reward ratio of two times the risk, the trader only needs one gain to cover for two losses. The beauty of this approach is that the trader’s winning ratio could theoretically drop to 33 per cent before he or she starts to lose money. Losing gracefully and winning with style, therefore, is usually what is needed. It’s also significant that having more than 50 per cent winning trades is not a prerequisite for being a profitable trader.
Sterling-dollar traders tend to be right 64 per cent of the time. Yet average sterling-dollar losses tend to be 105 pips, while the average gain will be 54 pips. For an article about this see http://bit.ly/CityAM01
Alejandro Zambrano is a DailyFX analyst.
azambrano@dailyfx.com
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