According to statistics on the websites of many forex & CFD brokers, an average of 77% of traders lose money trading derivatives. Other reports also say 90% of traders lose money trading online on a general scale be it equity, currency, commodities, etc.

However, a small percentage of traders making profits from the financial market are not magicians. Rather, they represent those who are strategic and prepared for any trading day. The saying “if you fail to plan, you plan to fail” becomes true here.

The secret to optimizing your trading is trading smartly; by having a trading plan that guides your moves in the market.

There are some important points that traders should understand if they want to have a chance.

Calculate your Risk to Reward Ratio (RR Ratio)

A risk to reward ratio is used to determine the return on every dollar invested in the market. Strategists and experts have been able to determine an appropriate risk to reward ratio to be 1:3.

What this means is that for every one dollar invested, the expected return is three dollars. Let’s discuss how to calculate RR ratio below:

Assume you spend $10,401 (entry point) to buy 10,000 units of CFDs for EUR/USD exchanging at $1.0401 and you set your stop loss at 1.0400 meaning if EUR/USD drops to 1.0400, you will sell everything off at a total of $10,400 (stop loss point)

Your target is that the EUR/USD will appreciate to 1.0403 meaning 10,000 units of EUR/USD will cost $10,403 (profit target)

Risk to reward ratio formula is RR= (Entry point – Stop loss point)/ (Profit Target-Entry point)

In this case RR = ($10,401 – $10,400)/ ($10,403 – $10,401) = 0.5 (or 1:2 since ½ gives 0.5)

As a rule of thumb, if your RR ratio is below 1 the trade will be profitable. The lower the RR ratio the better

Your RR ratio should be determined by your trading plan and the instruments you are trading. You should calculate your risk to reward when opening a trade if you wish to optimize your trading experience.

Stop Loss and Take Profit Order

A stop-loss order determines the amount of risk you are willing to take. It is used to limit your amount of exposure to losses when trading online. It tells the broker to close your trade when the price of the asset has crossed a predetermined stop price.
A stop loss order should be set at a level where you are willing to take a loss & exit the trade. It should be set after considering the capital you are risking on the trade.

If you are risking 50% of your capital on a trade, and set a stop loss at that level, and the market goes against you, your loss is very high, and it would take more winning trades to recover back the capital lost.

Guaranteed Stop Loss Orders (GSLOs) go an extra mile to execute your stop order, even when market volatility is high, and asset prices gap past your stop price. Some brokers charge a fee for it and depending on your location, your broker may not offer you GSLO

Similar to a stop-loss order, a take-profit order tells the broker to close the trade when the price of the underlying asset crosses a predetermined stop price. If you are going long, you set the stop price above the current market price of the asset; and if you are shorting the asset, you set the stop price below the current market price of the asset.

A stop-loss order or take profit order takes the stress off monitoring trade regularly, as you already know the profit & losses you can make in a worst-case scenario. It is a very good way of optimizing your trading experience. Not putting these risk management strategies in place is a bad trading practice.

Understand How Leverage Works

Many traders use leverage without understanding how it works.

Leverage is the use of borrowed funds to increase trading capital, and it is expressed as a ratio, for example 1:20.

Before your broker gives you a loan to trade with, you need to show good faith by depositing a percentage of the required capital, while he lends you the rest. This percentage deposit is called the margin and it is what gives you leverage to trade higher than your own capital could have afforded you.

Margin and leverage are inversely related so a margin of 5% gives you a leverage of 1:20 meaning 1/5%. This means for every $1 you have in your margin account you can trade assets worth $20

Although leverage can amplify your profits if the market moves in your favor, it can also significantly reduce or wipe out your trading capital if your projection is wrong.

Because of the huge risks involved, many major regulators like the FCA, ESMA & ASIC have imposed & renewed strict restrictions on leverage on CFDs to retail traders.

Trading Plan in important and Back-test it

A trading plan is a documented set of rules that guide a trader’s entry, exit and funds management in the financial market. If you are to optimize your trading experience you must have a trading strategy in hand and stick to it.

However, just having a trading plan is not enough, your plan must be tried and tested in demo mode or through a tester. This process is called back-testing. This means trying your trading plan against long-term historical data from the market to see how it will perform.

Although there is no guarantee that the future outcome of a trade will play out as in the past, if you have a plan & a strategy, then you have a checklist of what you are doing & what could go wrong, compared to random trade each day.

Many online brokers have this data on their platforms so you don’t have to worry about finding it. Having a trading plan that has been back-tested and shows good results is a sure way of optimizing your trading experience.

Think Macro Economics

The financial markets are not moved by what happens in small businesses, although that gives you an idea of the general economy. But it is rather moved by the policies that are made at the national and international levels such as increases in interest rates, recession, unemployment etc.

The Hawking Fed & aggressive rate risks has caused the US Dollar Index to hit new highs in 2022. Without understanding macroeconomics, a trader could be trading against the general market sentiment.

You should put the macroeconomic situation of the country whose currency you are trading in focus.

Always Perform Fundamental Analysis

Fundamental analysis has to do with analyzing the financial health of a company before investing in or trading its shares. To study the books, you look at the balance sheet, income statement and cash flow statements. You also consider historical performance, and top management caliber.

Fundamental analysis helps you come up with metrics such as Price to Earnings ratio (PE ratio) which tells you if company shares are overpriced as this might mean investors see growth potential.

Overpriced shares could also mean earnings have fallen but investors haven’t noticed so they haven’t panicked and started selling off their shares. It all depends on how you look at it.

Generally, the lower the PE ratio, the better. Other metrics include Earnings per share (EPS), Debt to Equity ratio, etc. To optimize your trading experience, ensure you do fundamental analysis all the time.

Avoid illiquid assets

An illiquid asset cannot be easily converted into cash, without experiencing some significant level of loss. Illiquid stocks may be good for value investors, however as a trader you don’t intend to buy and wait too long.

You need to target assets with a high daily trading volume as well as good potential. When you trade in assets that are in demand, liquidity providers can easily match you with a counterparty to enable you to exit and close your open positions, before the market moves against you.

Trade only major currency pairs

An average of 6.6 trillion dollars exchanges hands daily in the global forex market according to the 2019 BIS report. While this figure seems big, countries around the world do not have an equal input.

The major currency pairs in forex are just four: EUR/USD, USD/JPY, USD/CHF and GBP/USD.

The EUR/USD nicknamed “fiber” was approximately 23% of the global forex transactions in 2016. Before you sign up with a broker, carry out a comparison to help you pick forex brokers who offer tight spreads on these major currency pairs. The secret here is to trade these major currency pairs, instead of the minor and exotic ones.

Choose a broker that is Safe

There are many brokers that have their trading apps & accept clients in SE Asian countries like the Philippines.
But it is important to know that not all types of trading are legal or safe. For example, forex trading is very popular in many SE Asian countries, but it is still unregulated in most of these regions.

The broker comparison website Safe Forex Brokers Philippines warns traders in the Philippines to not trade CFDs & forex as it is not regulated. But it points out that there are still around 100,000 active traders in the Philippines. And there are over 30 foreign regulated CFD brokers who accept clients based in the Philippines, without being regulated locally.

An unregulated broker can do a lot of things to scam users. For example, a broker could charge you extremely high fees, or trade against you & offer excessive leverage so you would lose your capital quickly.

Measure your profits by percentage instead of volume

How you measure your profits compared to your capital determines whether you are making enough profit from your trading plan or strategy.

Imagine you started trading with $1m and made a profit of $10,000. It is 1% of the trading capital. However, if someone else invests $50,000 and makes $2,000, that is a 4% profit and that person is more profitable than you.

Doing this will help you stay focused on realistic returns and not feel you are underperforming which could lead to FOMO trading.

Be a smart Trader

If you are to continue engaging in such business and the forex market. Successful traders are those who have been able to optimize their life to success irrespective of the field. I just looking.

 

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