Foreign Currency Exchange Profitability Patterns
When you trade forex you need to know what makes a trader profitable. There are certain patterns that you should look for when you consider profitability. Of course, profitability does range depending on the goals set out by the trader. However, if you look at these patterns you may see if you are at least going in the right direction.
Having a Risk to Reward Ratio
A lot of forex brokers state that their traders make a profit on at least 50% of their trades. Many new traders may feel that this is a fair percentage, but the problem is that traders generally lose more on the losing trades then they make on the winning trades. To be profitable you need to use stop loss orders and have a set risk to reward ratio.
Stop losses are the best way to protect your trading account from losses on the foreign currency exchange. Most traders are unable to monitor all their trades all the time so you have to rely on these orders to limit your losses. Where you place the stop loss will depend on your trading strategy and your risk management plan. In your risk management plan you should also have your risk to reward ratio. Profitable traders will have a ratio of 1:1 or better.
Using Foreign Currency Exchange Market Sessions
Another pattern to identify profitability is to look at how you use the different market sessions. There are four market sessions that you should know about. Each market session has its own conditions and behaviour. To be profitable you need to combine your trading strategy with the best market session. Range traders do well during the Asian trading hours because the market is more limited and ranges more. However, there are volatile times during the Asian market that profitable traders will know about. During these times the profitable range trader will not trade or will change to a trend strategy.
Using Leverage Correctly
The reason why many forex traders are not profitable is their use of leverage. If you use too much leverage in a volatile market you are going to wipe out your account. Even using leverage with a ranging market can lead to a margin call. Profitable traders are smart with their use of leverage and never overdo it. The leverage they use will never cause their trade to exceed 2% of their trading account.
Using Volatility Correctly
The forex market is a more volatile market than other financial markets. It is important that you know how to use this volatility to your advantage. Profitable traders will have primary or supplementary trading strategies that utilise the volatile market. Having these strategies allows the trader to try and make a profit with any market conditions.
Understanding the Tools
To be successful and profitable on the forex market you need to understand how to use all the tools. These tools will include technical and fundamental tools which help you gauge what the market is going to do. When you are able to use these tools effectively you will be able to make more profits on your trades. Of course, you can never be 100% accurate with your predictions, but you can get closer than you have before.