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Saturday, September 7, 2013

What Makes a Profitable Forex Strategy

1) Decent Winning Percentage 
If you are looking for a strategy that wins 100% of the time, I will suggest you to stop wasting your time like what I used to be when I first started trading a few years back.
As long as a strategy has a winning percentage of 65% and above, you will be making a decent income every month. If coupled with high risk reward ratio, you will be making a very decent income every month.
I will explained more about this winning percentage in the next part of this criteria post.
2) High Risk Reward Ratio
Risk reward ratio refers to the amount of risk versus profit that you make in every trade. Let says that you trade with a stop loss of 30 pips and take profit at 60 pips, you are having a risk reward ratio of 1:2 for that strategy.
In general, the higher the risk reward ratio for a strategy, the better income it will likely to make. So let us take an example.
Let says that you enter 10 trades every month and your strategy has only 50% winning percentage. This means that you will win 5 of the trades and lose 5 of the trades.
Assuming that your strategy takes profit at 60 pips and stop loss set at 30 pips.
Amount of Profit = 5 x 60pips = 300 pips
Amount of Losses = 5 x 30pips = 150 pips
Total Profit = 300 – 150 = 150 pips
If you are trading with 1 standard lot per trade, you are making $1,500 per month with this strategy. Imagine that it has higher winning percentage, then your income will definitely be higher.
From the example above, you can see that the key to profitable trading lies in the risk reward ratio and not really on winning percentage. Therefore for me, I will only trade those trades with at least 1:1.5 risk reward ratio.
3) Easy to Execute
The next factor to a profitable strategy is the ease of execution. There is no point to have a trading plan that has good risk reward ratio and wining percentage but you have difficulties getting into a trade.
You will be surprised to find that the trading plan used by a professional trader is very simple. Most new traders tend to have the thinking that a good strategy is one that is very complicated. In fact, it is the other way round.
4) Decent Amount of Trades Every Month
A profitable forex strategy must have a decent amount of trade available for you every month. I am not referring to having a trade everyday. As long as the trading plan produces 2 to 3 trades every week, it is considered a decent trading opportunity to me.
The above are what I think makes a profitable forex strategy and I am looking forward to your comment. Do feel free to give your comments below as it will be very useful for other traders here in this community.
If you have yet to have a profitable strategy on hand to trade with, you can take a look at the 4 profitable strategies that I use to trade every month.

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