Let The Trade Come To You
Today we talk about a topic that traders are divided on. So before I even start, I want to point out that if something is working for you, STICK WITH IT! You shouldn’t fix something that isn’t broken. But if it is broken, you can possibly try another way? Just saying.
The idea of waiting for an opportunity came from a former mentor of ours, way back when we were trying to grasp the theory behind Forex trading. We had minimal experience under our belts and were still experimenting with different strategies and methodologies.
We met up with him and brought our laptops along, ready to pick his brain about where we were going wrong. Before we got started, he asked to see our trading history and asked us to show him how we traded at the time as well as the logic behind the trades we took.
After going through each of our trading plans and trading history, (funny enough, I had the most trades, Emmanuel had less and Guy had the least. Just shows how different personalities can shine through in trading) he pointed out to that each of our approaches made sense and should be profitable. But he suspected we all lacked one thing.
He then brought out his laptop and showed us his trading history and his methodology of trading. He showed us that his reasons for entering a trade were not very different from his. The only difference was he didn’t RUSH to get into a trade that looked promising and didn’t CHASE after a trade that had already exited.
He let the market come to him. He knew where he wanted to get in and had a limit order (a trade order with instructions to execute a buy/sell at a certain price) to enter. Outside of his limit orders, he didn’t trade.
This is where some people may start to disagree with this logic. Some people preach about not being a perfectionist when entering trades and that you should worry about the management of your trade. But this was not his approach, and it worked for him. Let’s break down why it worked for him.
Risk vs Reward
Simple! That is what he achieved by only taking trades that he wanted to get in. In Forex trading, two traders can enter the same trade (with the same risk) and end up with two VERY different results.
What are you gaining from what you risk? That should always be the question on your mind. So our reasons for getting involved in a position were roughly the same, but the dollar reward we got was less than the reward he achieved, even though we made the same amount of profit in pips. Let me provide an example:
We both (The mentor and I) risk $1 for a move that might be 100 pip winner.
But I risk 40 pips for that move, which gives us a 1:2,5 Risk vs Reward ratio (RR).
He risks 20, if not less, pips on the same move and ends up with a 1:5 RR
So for the same exact trade, with the same exact risk. I get paid $2,50, and he gets paid $5,00.
This is just an example, but it shows you how easy it is to go from profitable to unprofitable or vice versa. The same strategy could give the same signals, yet the traders who can squeeze more out of their trades will always come out on top.
I’m not saying you have to change your trading style and start using limit orders to be profitable, I’m saying focus on your RR. How much are you getting out of your trades? If you set yourself a task of always taking 1:3 RR trades, are you actually doing that? Are all your winners greater than 3? Cause if not, that could be the reason you are not profitable.
You know for sure if all your winning trades are greater than 3, you only need to win about 30% of your positions to be a profitable Forex trader.
Yes, you won’t be HUGELY profitable. To obtain the profits that you desire, you need to get more out of your winning trades (higher risk to reward) OR you need to win more of those “Greater than 3” trades to see real profits (higher win %).
It’s that simple, except the former is easier. Being right in financial markets is challenging. Getting the most out of what you ALREADY have is going to be a lot easier. So study your system and optimize how much you can actually get out of a trade.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.
Patience in trading FAQ
Excessive screen time will make it hard for anyone to sit on their hands and wait for a great trade. Only come to your phone/laptop when it is time to trade.
1:3 is the industry standard but I would recommend going higher than that if you can help it.