The reason why the industry is receiving a lot of under performing traders is due to the fact that many traders fail to understand that trading should be treated as sequence of clusters of good and bad trades with out you even knowing what cluster will show up first on the sequence. The reason i have survived a long time in this industry and to be honest i have seen many come and go in a span of 4.5 years. I manage risk very differently from other traders i have come across. This way has allowed me to stay in the game for a long time. I am a risk manager by profession and that does not mean you need certification to become a good risk manager in Forex. You need to understand your risk appetite and have a goal to invest where the risk reward ratio is greater than 5. How do you do that? You can go through this video IMPORTANCE OF RISK MANAGEMENT IN FOREX Also Concept of a tight stop loss
When looking for investment opportunities in the Forex market, Capital preservation is very crucial. How you protect yourself before throwing money on the line, Surprisingly many traders think vice versa, they get tempted such a point where the main focus is the reward only and by doing that, they expose themselves to a point where conscious can not handle the pain of going wrong. At this point a trader can not be wrong since it can cost his/her entire account.
You have to understand this folks. ” Clusters of good and bad trades”
When trading we have patterns namely positive patterns and negative patterns. We call them clusters meaning group of good or bad trades that are executed for a given amount of time. The bad thing is, we only get to analyze this when the sequence is over let’s say 3 months or 6 months or a year. No one can predict and entire cluster of good trades only in a row or bad trades only in a row. But we sum up the overall performance and measure the results after a particular period of time. Here, we get to see in a group of 100 trades only 40 of them were right and the remaining 60 of them where wrong.
So why trades fail to perform?
When the sequence is taking place a lot of traders make huge mistake of thinking that the current cluster will only provide positive trades. So a normal Forex trader will just risk more money per trade. But unfortunately the sequence contains clusters of good and bad trades all mixed together. During the bad trades the trader has almost blown 40% of his/her account and by the time a good cluster has arrived the trader is automatically out of the game.
The other reason is not taking full advantage of the good cluster. Risk reward is every thing and i love it because this is the only reason why traders are not succeeding. When a trader was in a tough times of losses he/she was taking full hits. I mean all trades hit stop loss but surprisingly when the same trader gets the good times he/she takes very less profits instead the good cluster is over again and the trader has made nothing at all. By the time a whole sequence is over meaning all clusters are over the traders account is devastating.
You should understand that as traders you have limited time called a sequence. In trading and each sequence consists of good and bad clusters. Your job is to protect your capital on the bad clusters and get huge risk reward on the good clusters. This all comes down to the strategy you are using how reward full it is and many more aspects. Funny thing is if you just trade consistently executing your path, you will never loose your account when the bad clusters arrive.
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Raymond is a professional currency trader with experience of 4 years trading the financial markets. Certified Risk Manager and Contributor at profxtigers.com
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