It’s very easy to learn the basics of forex trading and start trading the markets. However it’s extremely difficult to come up with just a single trading strategy that will make you money in the long run. So how do you go about achieving this seemingly impossible objective?
Well there are basically two different approaches you can take.
The first approach is to try and come up with a simple trading system that wins more than it loses. In other words you devise a basic system that uses the same target price and stop loss, whether it’s 10, 50, 100 or 200 pips, for example.
The major benefit of this type of strategy is that you only need to come up with a system that has a success rate of 51% or higher in order to make money. This is actually quite easy to do because by employing a few technical indicators and/or using key support and resistance levels, you can push the odds in your favour and achieve a success rate well in excess of 50%.
The second approach you can take is to try and come up with a system that uses a tight stop loss but looks for gains in excess of this stop loss. For example you employ a stop loss of 20 points, but target 50 or 100 point gains per trade, for instance.
This is arguably the more reliable type of system because you need a much lower overall success rate in order to make money. Let me give you an example to demonstrate this point.
If, for instance, you employ a stop loss of 20 points but are looking for big price movements of 100 points per trade, then you can make consistent long-term profits with just a 20% success rate. So for every five trades that you open, you could have four losses and just one winning trade because you will still come away 20 points ahead. Obviously if you were to boost the overall success rate to 40%, then you would be able to generate a profit of 140 points from every five trades.
So the point is that there are two main ways you can go about creating your own profitable trading system. You can use the same amount of points for both your target price and your stop loss, and look for a simple system that generates winning trades at least 51% of the time, or you can target greater gains per trade so that you can make money with a system that has a much lower success rate. Both types of system have their merits.
Source by James Woolley