Learning How to Lose in the Forex Markets

Filed under: Learn Forex Trading |

 

Screen shot 2013-04-23 at 10.03.09Today, I will attempt to teach you the importance of learning to lose in the forex markets. “What? But I want to win!” I hear you say. Well, unfortunately, in the vast behemoth of the foreign exchange markets, winning and losing go hand in hand – and losing has to be seen as a part of doing business.

 

Just as every business has overheads and costs so too does being in the business of forex trading. There are basic costs of course such as buying a computer, paying for Internet service providers, electricity, etc., but the costs I am really talking about are the losing trades. These are the costs that you must take in order to make the business work.

 

There is no trading system in the world that produces 100% winning trades – and in fact, most of the most profitable traders in the world have a very low winning percentage. This is because this is often where the value is – in having a small amount of big winners. The more trades you make, the more the spread becomes an added cost. Moreover, the higher the winning rate, the lower the risk-reward scenario tends to be. Let’s take the following scenarios:

 

1)    A win rate of 70% with a risk-reward of 3:1 (that is risking $3 for every 1$ of profit).

2)    A win rate of 60% with a risk-reward of 2:1.

3)    A win rate of 50% with a risk-reward of 1:1.

4)    A win rate of 40% with a risk-reward of 1:2.

 

So which scenario are you most attracted to? If you are a beginner, I would wager that you are attracted to the higher percentages of win rates – am I right? Well, here would be the profit/losses of these scenarios over 100 trades each risking $100 per trade.

 

1)    -$666

2)    -$1000

3)    Breakeven

4)    +$2000

 

As you can see, it is not all about having a high win rate, but about having a good risk-reward scenario, and learning to take losses for bigger wins. This is something that is, emotionally, easier said than done.

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