A lot of beginning traders come to the online forex trading world in the hopes of making “da big bucks”. Yes, there are some who will fall in love with the game and develop strategies involved in profitable forex trading, but the vast majority of beginning forex traders just want to push a few magic buttons and start getting checks in the mail
What these traders don’t understand is the universally backwards nature of this business…
In order to make money forex trading online, Everything seems upside-down! You need to buy when the market is weak and traders are pessimistic and depressed, and then SELL when the market is strong and traders are greedy and optimistic! (Remember how crazed everyone was about the riches available in the housing market JUST before everything blew up and the financial crisis began?)
In the same vein most new traders are scrmbling to do everything they can to find forex trading software tools and ideas to increase their win rate. I would argue that many traders will eventually find that their most profitable forex trading strategies are those with the lowest win rate.
( Believe it or not!)
The reason for this I believe is the inverse relationship between risk and reward and win rates.
You can build a forex trading strategy with an extremely high win rate, but it will likely have a very weak level of profit per trade. For instance, if you risk $100 on a trade with a 60% win rate, it is likely that your average gain will be say $100-$150.
If you want even more accuracy, say 80% winners, then it is likely that your average gain will settle out nearer $50-$60 per trade.
On the opposite side, if you are wiling to lose 7 or 8 times out of 10, average gains of $400-$500 are possible!
Let’s look at the math behind each extreme…
Let’s assume you trade 100 times using a high accuracy forex trading strategy.
You gain $50 on the 75 winning trades and lose $100 on the remaining 25.
50X$75=$3750 in gross gains.
25X$-100=$2500 in total losses.
Most commission based brokers who offer forex trading online charge around $5 per $100,000 so we will estimate commissions of $500 for 100 trades.
So, $3750-$2500-$500=$750 in profits for all your work in spite of a 75% win rate! Now, let us look at a strategy on the opposite side of the equation…
Once again we will analyze 100 trades.
Except this time your forex trading strategy only wins 1 out of every 4 trades.
While this sounds terrible on the surface… Let’s look at the math behind this low accuracy strategy.
Your win rate is only 25% because you are targeting larger profits from your online forex trading…
If your average gain is $400 then your results would be as follows…
75 losing trades of $100 = $7500.
25 winning trades of $400 = $10,000
$10,000-$7500-$500=$2,000 in profits!
So, as crazy as it sounds, you can see from the examples in this experiment it is more then TWICE AS PROFITABLE to trade a forex strategy that loses the majority of the time!
Who-da-thunk it??
So take a minute to revisit some of the forex trading strategies you have given up due to a low win rate… You might be pleasantly surprised by their longer term profit potential!
