In this video, we run through the top 3 goals you should set when entering a Forex trading contest.
Click play on the video below.
Let’s take a look at the top 3 goals.
One of the challenges every trader faces before entering any trade is the fear of being wrong.
But we take a different perspective when it comes to trading, and look at the expectancy of your trading system.
Your expectancy is how much you expect to make for every dollar that you risk.
The formula for calculating the expectancy of your trading system is simple.
(Win % x Average Win Size) – (Loss % x Average Loss Size)
For many traders, knowing the expectancy of their system makes a dramatic difference in how they look at each potential trade.
Instead of looking at a trade with fear, they understand that to achieve the expectancy of their system, and they must take every trade their system generates.
You may be thinking that by mistake, we mean silly trades.
But we are coming from the perspective of the execution of your trading plan.
For example, if your trading plan said to wait for the RSI to be below 70 and rising to buy, but you jump in just before it turns, then that is a mistake.
Even if the trade ended up being profitable, in terms of your trading plan rules, you made a mistake.
It is a fine line, but one that is important if you are to replicate and scale any trading plan you currently have.
For many people, if they could eliminate their top 3 trading mistakes in any one year, it can completely change their results.
Other silly mistakes you need to avoid:
· Entering orders incorrectly
· Putting wrong figures in for entries or exits
· Jumping into a trade before your system criteria are met
· Trading with higher leverage or more contracts than what your trading plan dictates
· Violating your rules
We’ve all made these mistakes, but the closer you can get to minimising these silly errors, the greater the chance you will realise the expectancy of your trading system.
Starting with aggressive trading goals sounds like the alpha way to do it.
But when we interview the winning traders, we often find how conservative their thinking was at the start, before a purple patch hit and led to outstanding results.
Ideally, you want to set modest trading goals based around sensible risk-reward figures.
Let’s run through a series of questions with a hypothetical person we’ll call Sophia.
ACY Staff: Hey Sophia, how much would you like to make on your $50,000 trading account this year?
Sophia: I’d like to make 100% so that I can replace a good portion of my current income.
ACY Staff: How much of your $50,000 starting balance are you willing to risk to make that return?
Sophia: I don’t want to lose anything. I thought we were doing this to make money?
ACY Staff: Well Sophia, all investment involves risk, so would you be willing to risk 10% or $5,000 to make $50,000 in returns or perhaps 20% ($10,000)?
Sophia: $10,000 sounds way too high. I’d be happier risking maybe 10% or $5,000.
ACY Staff: Ok, so you are willing to risk 10% to make 100%?
Sophia: Yes. That sounds about right.
ACY Staff: Do you know of any investments that consistently bring in 10 times your initial risk?
Sophia: No. I’ve not heard of any.
ACY Staff: Well, for most traders, a 2 to 1 reward to risk ratio or perhaps a 3 to 1 reward to risk ratio is more in the ballpark. Therefore, to generate 100% returns with a 2 to 1 reward to risk ratio, you’d need to be willing to lose 50% or $25,000. Would you be comfortable with that?
Sophia: Absolutely not. I work hard for my money.
ACY Staff: Then perhaps at 2 to 1 reward to risk, your trading goal on $50,000 could be more like $10,000 with the potential risk of $5,000. Does that sound more realistic?
Sophia: Yes, it does.
Your goal as a trader is to think in terms of excellent risk-reward trades that help you achieve your financial objectives.
So, there you have the three goals you should consider when entering a Forex trading contest.
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Ashley Jessen is the author of CFDs Made Simple and Chief Operating Officer at ACY Securities. He has been in the financial services industry since the year 2000 and worked for some of the leading companies in the CFD, Forex and Online Trading space.