eToro – Forex Trading Forum

[djsheckie]

So, how do successful traders make their profits? Very often new traders think that in order to be a successful trader the vast majority of your trades must be winners. In actual fact 50% or more of the trades made by many successful trading strategies lose money. So how are these traders successful? The traders and more importantly their strategies aren’t successful because they’re right about every, or even most trades, but because when they are wrong they quickly stop the trade and cut their losses. However, when they are doing well they let their trades run and profits increase.

[djsheckie]

While it’s possible that the particular trading strategy that you eventually settle on and prefer to use while trading may have a higher success rate than the one mentioned in the above post (if it does the please feel free to share it with everyone here ), any trading strategy is bound to have it’s share of losing trades, so a major component in staying in the FOREX game is to have a set strategy for managing any and all losing trades so that they do not spiral out of control and wipe out all your trading wins chances for success.

[djsheckie]

It is with this key factor in mind that most traders try to set up a plan for setting their initial stop loss. This should be the amount that they feel they can afford to lose on a per trade basis without having too much of a detrimental affect on their account. Of course this amount will vary widely from trader to trader and especially from strategy to strategy, but as many studies have shown trading strategies and traders who risk more than 2% of their overall trading capital on any one trade are rarely successful over the long term.

[djsheckie]

Unfortunately, it seems that most traders (especially the newer ones) risk way more than this on an individual trade basis which is another large contributor to the high failure rate among traders. However, the traders who set their per trade risk level at 2% of their trading capital or even below that, not only manage to protect themselves against a situation where a fairly lengthy string of losses could knock them out of the game, but they also put themselves in a much less stressful situation because any one trade is not going to make or break their trading account.

[djsheckie]

This is important not only from a money management standpoint but also from a psychological standpoint in that they aren’t attached to any one trade and are therefore more likely to stick to their overall strategy. In order to have a realistic limit one needs to calculate what this number should be for the specific strategy they wish to pursue. In order to calculate this you will need to know what the expected accuracy rate is for your strategy, something which I will hopefully cover later, but you should be able to look this up online.

[djsheckie]

For the time being however, it is sufficient to understand that you need to have a feel for how much you plan to risk on a per trade basis. This is a very important first step in designing a successful money management strategy. Also, remember that you should think long and hard before pursuing any strategy which risks more than 2% of your trading capital on any one trade. Now that we understand that determining how much to risk per trade is the first step in any successful money management strategy, we can move on to other methods of setting your initial stop which fit within the limit set by the amount a trader is willing to risk on a per trade basis.

[harelei]

Thank you. This is the best advice I've read since I started 'practice' trading 4 days ago. I stopped after the first section, closed the losing trades, giving up on the notion that they might get a bit better if I left them, and returned to read the rest. I have been trying to set the stop loss parameters, but they don't seem to be working, which means I can't leave the platform unattended. These been no response from the eToro support. Anyway, it's all quite fascinating - I'll keep educating myself, and will check the forum regularly for advice... Thanks again.

[djsheckie]

You're welcome Harlelei! Glad you found the post helpful and also that you were able to stop the trades that were losing you money. I know it's really hard to walk away sometimes. Most traders (especially the newer ones) are generally tempted to hold a losing postion in order to make more on the chance trend reverses but as I said in the post you're better off to close the losers and take profit on other trades.

I haven't had problems with the stop loss function but at any rate keeping an eye on the platform is always your best bet.

Happy trading. :)