Understanding your targets in Forex trading strategies
Many of us stumble upon retail Forex trading by accident, as opposed to design. We may have read online articles published in the mainstream media, citing the virtues of trading, or the benefits of investing in currencies. In order to supplement the meagre returns offered in our new normal, low interest rate, investment world, our attention will be heightened when we read the promise of easy money.
We may have a colleague, or friend who’s taken a position in a currency over a medium to long term, who rejoices in informing us that the profit they’ve made; by moving their savings from sterling to Swiss francs, will pay for the family’s summer holiday this year. And these anecdotes and articles are generally delivered in such simple terms we can be forgiven for thinking; “what could possibly go wrong?”
The majority of us begin trading forex with completely unrealistic targets. We become seduced when we read traders on forums openly bragging how they’re making “10% return per week” from a $5,000 account and how they’re “killing it” with the strategy they’ve recently created using the: PSAR, MACD, RSI, DMI, slow and fast stochastic, with trades taken off a five minute chart. They’ve even reached the top ten in the trading charts on a mirror trading site, with their patented strategy, which you can (conveniently) subscribe to for $100 a month. They’ll neglect to tell you that the strategy regularly experiences 50% drawdowns; not everyone copes well when seeing such a proportion of their hard earned savings disappear inside a ten day time period.
There are few certainties in trading, but we can conclusively guarantee certain aspects: there are no short cuts in trading, and historically no one individual trader has proven a record of consistently making gains of 500%+ annually. Actually, there are short cuts, but not in the manner most folk would consider and it’s a subject for another day, as it involves short-circuiting the bad advice that’s out there, as opposed to taking short cuts.
Setting reasonable targets for our Forex trading strategies
So how do we set reasonable targets for our Forex returns, what represents a reasonable return on our investment, or ROI as its referred to? Perhaps we should set a: weekly target, monthly target and annual target. Perhaps we can walk through a scenario of where we’d like to be in, for example, twelve months time and reengineer a strategy to accomplish that aim.
Let’s start with an aim to generate one percent account growth per week. In many online forum circles such a low ball target would be dismissed as lacking ambition, but bear with us, as if we achieve this target we’d be banking a circa 50% annual return on our account size. As such we’d be beating the best fund managers on the planet by some distance, although we wouldn’t have the costs associated with their operation. But there’s an unintended consequence of aiming for such supposed modest returns which many experienced traders would point to as the true “holy grail” of trading; your risk per trade will be negligible. Let us explain.
Risk Calculations
Let’s surmise that you’re a day trader, trading the euro EUR/USD only because it’s spread, through a reputable STP/ECN broker, is consistently around (or less than) one pip per trade. You’re taking (on average) ten trades per week (two per day) in a relaxed, calm and efficient manner, in concert with your bullet proof trading plan. Six trades are winners, close to your take profit limit order and four trades are losses, with all losses hitting your stop. Your risk per trade is one percent of your account size and your take profit limit order is similar, you’re looking for one percent profit on each trade.
Therefore, in theory and in perfect trading conditions (relating to your plan), you’ll be banking somewhere in the region of two percent account growth per week, but critically you’d only be risking one percent per trade. With that one percent risk based on a normal (yet random) distribution of winners and losers, you could possibly see gains of circa 100% per annum. Dial your risk down to 0.5% of your account size per trade and you could realistically be aiming for 50% gains.
Ask yourself the following questions:
- Is that a reasonable goal to aim for?
- Is it realistic?
Why not consider fixing your sights on a “one percent for one percent” Forex trading strategy? One percent risk per trade, aiming for one percent return for week.