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Most traders have an inability, to maximize open profits and bank them to soon which means they never cover their losses and lose so how do you overcome the problem?
Forex Price Movement: Winning Percentages and Average Profit and Loss
“I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30 percent of the time. (Bill Lipschutz)
Bill Lipschutz is known as one of the greatest FX traders of all time. While working at Salon Brothers he once had 16 positive months in a row. At this time, he turned over half of the currency-option volume on the Philadelphia Stock Exchange and was on many occasions, responsible for up to 80% of the open interest on the market and you can learn from the above quote:
Most traders trade Forex with the strange idea, that there going to win 70, 80 or 90% of their trades! This myth is fed to them, by robot sellers and marketing gurus, who say they have discovered the secret of market movement but of course this is not true. If Bill Lipschutz can't win more than half of his trades, you or I are not going to do it either.
Why do Traders Care About How Many Trades they Win? When It Doesn't Matter
“The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.” (Bill Eckhard)
Another true great trader and a very true point. Eckhart made hundreds of millions of dollars and was involved in the Turtle Trading system which had a losing ratio of 70% but still made huge gains because the system ran winners. Once you understand, you are only going to win on around half of your trades you will see the only to win:
An Obvious Conclusion....
Firstly, that taking losses quickly is needed and this pretty easy - You SET a stop at a level and that's it. The profits you can get from a trade are open and you have to DECIDE when to bank and when to hold and this is harder in my view.
There is one point that is clear – You MUST run your profits to cover your losses and this means if you are risking 50 – 100 pips you must make 200 – 300 on your winners but when you have a profit emotions will come into play...
Greed and Fear and the Impact on Traders With Open Profit
The problem for traders is once they have a profit, they have made money and greed comes into play and if they are not fully confident in their trading strategy, they don't want to lose it and want it to become bigger but they lack the confidence to hold onto it and snatch it to early. The emotion of fear comes into play and when, they see an open trade profit reduced (as the market comes back against them, even by just a few pips) they fear losing all the profit and think, it could become a loss so they liquidate the trade.
The problem is they have a profit which is small and it won't cover their losses. They continually look at small fluctuations (which always occur in any trend) and this distracts them from the bigger picture which is the potential for the open profit on a trade, to develop into an even bigger profit. So how do you overcome this problem?
Holding Trends for Maximum Profit
Many people online will tell you, the best way to overcome the problem is to open and close trades within a day so day trade or scalp. You only have the trade open for a short period of time and this means that a profit is taken out very quickly and you don't have the problem of holding onto it over night or for days on end, when emotions can distract you. This would be the solution if short term strategies worked but of course they don't day trading and scalping is a losers strategy. So what do successful traders do?
The key is when in an open trading position to only liquidate it, if your charts show you that a major level has been penetrated against you. Unless this happens, you should hold the trade and trail the stop loss up, until your target is hit.
Sure you will get stopped out on occasions but on other occasions you will hit your target or even, adjust your target up as the trade unfolds. Most traders don't monitor the market in this way but you need to – the chart action changes everyday and you, need to go with the chart formation as you see it as the trend develops - not the way you saw it, when you first put your trading signal in the market.
Keep in mind if you got just 50% of all the major trends you would be very rich – perfection is not possible when trading currencies but making big profits is.
Final Words
The reality of trading currencies is that psychology is the key and just as your emotions will tell you to run losses, they will also tell you to take profits to soon. You need to overcome both problems, so you can cut your losses and run your profits which is the key to long term trading success.
Running profits, presents a bigger emotional challenge and in my view is harder than taking losses but if you study the facts and realize its the only way to win, you will enter the elite 5% of winners.
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