Many traders, whether new or more experienced, tend to set targets for their gains and losses. While this may be beneficial to them, it may also be dangerous and counterproductive to their development. FOREX, like any other financial instrument, varies according to market volatility.
The greater the volatility of an asset, the greater the theoretical price variation. Therefore, if a trader tries to achieve a 10% return on investment target at any cost and market opportunities are not available, it may encourage him to make bad decisions that will affect portfolio growth.
This article will help you to establish an effective trading strategy for FOREX in general.
Concerning the number of trades per day/week
Many traders choose to stop the day when they have reached certain profits or losses. This is debatable and depends on the psychological strength of each person. A trader whose first 3-4 trades lose out will have to question himself and may stop trading for a day in order to readjust his strategies and not tell himself that he has not yet reached his 10 daily trades.
Others may be able to reach the 10% of their portfolio they had set and stop trading to secure their gains while others may choose to try to generate more profit. Each decision depends greatly on each trader and their psychological barriers in advance. There are no predefined rules regarding the number of trades to be made during the day.
Some traders use Stop-Loss in an inappropriate way, choosing a particular limit based on no statistical data. However, the volatility from one currency pair to another can vary greatly. There is a different Stop-Loss for each currency pair in which you invest.
Stop-Losses must be implemented by means of technical measures and very precise probability rules in order to minimize as much as possible its risks while giving itself a chance to generate profit.
The profits to be achieved
The objectives in Forex to be set in terms of profits should not be too high or too low. As a general rule, a reasonable objective is a profit equal to three times the risk of the transaction. Suppose that a currency pair has a ratio of 1 and a Stop-Loss of 0.9 is set at -10% of the initial ratio. We can therefore set ourselves the objective of reaching a ratio of 1.3, i.e. an increase of 30%.
Tip: Once this target has been reached (1.3), it is quite possible to redefine your Stop-Loss and place it at 1.17 to try to reach a ratio of 1.69. This way, you do not limit your potential gains if the currency pair is rising and you will in any case win if the ratio were to fall below 1.3. Having a Stop-Loss of 1.17, you will have earned a return on investment of 17%.
Do not limit yourself to the best known currency pairs
How often are the currency pairs EUR/USD, GBP/USD or EUR/GBP mentioned on FOREX websites? Countless times! You can also find this point on our website where we use the EUR/USD pair as a reference in our comparisons.
Certainly, each currency pair has its own characteristics and each currency pair has common trends or is easier to trade in the time zones to which it is exposed.
However, a trader should not choose a currency pair to trade as he sees fit but rather let the FOREX market tell him where the opportunities are. So don’t limit yourself to the most reputable pairs but open your field of action to currencies less present on the forums but which have equally important movements.
A broker like Markets.com, for example, offers you more than 50 currency pairs.
Tip: Sometimes the fall of one currency pair leads to the rise of another. Indeed, even if it does not have the same currencies, some pairs are closely linked. Identifying its pairs will allow you to multiply trading opportunities. It is up to you to identify them while waiting for our subject on this point
A trader will have to adapt to the market rather than try to adapt the market to his Forex objectives. Apprentice traders will obviously have to set their trading limits. It would be stupid to lose important capital during the learning phase. The more experience a trader gains, the more risk he will be able to take and assume the consequences.
But not before! Learning is gradual over time and setting too big goals at the beginning can be daunting and can affect your trading success.