Why do people get excited about Forex Trading but fail in the end?
When it comes to Forex trading, you see it’s not just about putting enthusiasm and setting trades based on a strategy or a gut feeling. Setting up a statistical approach is very important to get profitable results on the long term. You have to think and be smart by monitoring statistical parameters which can help you track and detect strategy deterioration. Regardless of whether you are using Forex Robots or you are trading manually, parameters such as profit factor, expected pay-off or recovery factor are just three of the things that you should never overlook.
For instance, a lot of traders ignore their profit factor, and as long as they’re making some money, they think everything is safe and sound. We all know market conditions change but most of the traders aren’t really aware of that, so what happens when conditions change? They start losing money because their profit factors weren’t high enough.
Most of the traders consider a 1.2 profit factor as good enough for a trading strategy, in my opinion that is not good enough. Why? The reason for that is as strategies tend to deteriorate over time, the profit factor will decrease when market conditions change, reaching levels of 1.0, 0.9 and lower, point in which you will start losing money.
In contrast, when I am thinking about launching a trading strategy, my target profit factor is about 1.6, by doing this I create a buffer zone; this will give you enough time to realize your strategy is deteriorating, adjust your parameters it and fix all up before your profits decrease to unexpected levels. In other words, this “safe zone” gives you time to re-asses and re-test your strategy. Finally, let’s take a look at recovery factor, with this parameter I aim to have at least 2.0 and hopefully even more, which means I have that buffer zone to make adjustments on my strategy before this indicator deteriorates to an unacceptable level.
In conclusion, monitoring strategy deterioration by using statistical parameters is a key enabler to obtain and keep sustainable profits in the Forex Market. Don’t forget to always create that buffer zone and buy yourself more time to adjust your strategies and prevent costly mistakes. I hope you’ve enjoyed this post.
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