Risk Reward: Predict Your Forex Business Success

By The Lazy Trader on March 24, 2014

Here’s the jackpot question:

Do you want your Forex trading to be a business?

OR

Do you want to treat it like a day at the horse races or the casino?

Take a minute to get clear, because this question separates the successful Forex trader from the amateur full of wishes and dreams, but with an empty trading account.

Have you fallen for the trading myth that successful traders win more than 80% of the time?  That line is just that – a myth or the PR copy from a Forex scammer web site.  Don’t feel badly if you’ve already been snared by that dangling carrot.  You’re in really good company.

Professional Forex traders treat their trading like a business – a forex business – every day, day in and day out.  They have the same kinds of criteria a successful entrepreneur has for setting strategy and making decisions.

Rate your forex business against this checklist.  You:

• Have specific criteria for when to place a trade.
• Are vigilant – If the criteria are not present, you don’t place a trade.
• Know that most successful traders typically win 40% to 60% of the time, not 80% to 100%.
• Recognize that a trading loss is a forex business cost, like the commissions and spreads you pay, like software, office equipment or paper clips.
• Don’t let a loss send you into an emotional tailspin.  It’s just a part of the job.
• Realize trading losses are your biggest business expense and that success lies in mitigating or managing the risk on the losses.
• Stand confident in a trading strategy that minimizes risk and maximizes gain on each trade – and you are crystal clear on how vastly this differs from placing a bet on the random spin of a wheel.
• Are humble and clear about what you can and cannot control in the market.
• Understand where profit in your Forex trading business comes from – revenue from winning trades exceeding the costs of your losses.
• Let me repeat this Lazy Trader axiom:  You understand where profit in your Forex trading business comes from – revenue from winning trades exceeding the costs of your losses.

I can hear you asking the question:  Lazy Trader, if successful traders only win 40% to 60% of the time, how do I make my Forex trading business profitable?

To say this just a little differently – The key is to make the profit from the winning trades larger than the losses from the losing trades.

Risk Reward – How and Why it Works

This is also known as risk reward or risk management.  If we shoot for a risk reward ratio of 1:2 on every trade we take, we only need to be right 35% to 40% of the time AND we still make a healthy profit.  You honor your trading criteria.  If the 1:2 risk reward ratio isn’t there – you don’t take the trade!

This may sound a little simplistic.  Let me assure you that I’ve had thousands of conversations with would-be Forex traders.  This understanding that Forex trading is a business is a scarily accurate predictor of who will be successful and who won’t, of who will get sucked into the emotional quicksand of trading, and who will stay clear and objective.

The Lazy Trader magic is in the consistency of applying the model, the same rules day in and day out.  You simply apply your risk reward ratio of 1:2 on each potential trade.

Clearly, there is more to tell about having successful Forex trading business than I can cover in the few pages of this brief article.  I never sugar coat or gloss over the hard work of being a successful Forex trader.

What I am confident of is that the profitable trader sees the Forex trading business in a very specific way.

Just as in a conventional business, you:

• See losses and mentoring as investments, not raw costs
• Are patient, with a long term view and strategy
• Realize you have even less control over external variables in Forex trading than a conventional business does
• Settle on a single Forex strategy and stop continually looking for greener grass across the fence
• Have specific behaviors you apply consistently to each business day
• Continue to hone your skills and fine tune your experience
• Learn from each mistake
• Understand if things aren’t coming clear for you, you hire a mentor, consultant or coach to shorten the path and save you heartache, time and money

As you look at your current Forex trader stance, how do you rate against the checklists in this article?

How consistently are you standing by your risk reward ratio if 1:2?

If I analyzed your Forex trading approach, would I see a forex business or a gambler hoping random chance operates in your behavior?

How much longer do you want to have your trading be an annoying, frustrating and expensive hobby?

Ready to turn it into a profitable forex business? Click here