2Bull Forex Blog

We all know that online Forex trading involves risk – but on the other hand it offers one of the few ways to start with small stakes, and build real wealth very quickly.

This article is all about taking calculated risks at the RIGHT time to make triple digit annual gains – Let’s find out how to do this.

Much of this article does not adhere to conventional investment wisdom – but that’s not a problem, as 95% of forex traders lose all of their money or only manage to make minor profits.

Let’s start with an interesting fact:

I once knew a retired woman of 81, who had never traded currencies before yet, learned Forex trading in just three weeks.

She then started trading and made 129% annualised profits over 3 years!

She broke many conventional online currency trading rules – but that didn’t bother her at all she was to busy making great gains.

Let’s look at how she made big gains in her online currency trading.

She had a simple method:

1. She drew her charts by hand, and looked for valid support or resistance. When prices approached these levels, she looked for it to hold or to break to trigger her trading signals, with the following tools.

She used just two indicators to time her entry, (stochastic and RSI) and make sure she was trading with price momentum and the odds were on her side.

She went the way price momentum told her – but it’s the next points that will surprise you and really gave her currency trading success, and triple digit gains:

2. She traded infrequently

In her first year, she traded 3 times. In her second year, she traded 5 times. In her third year, she traded 3 times, that takes a lot of patience!

Her logic was:

Why trade if the risk reward was not heavily in her favour?

Many impulsive, novice and impatient traders could learn from this bit of Forex education – as most forex traders trade too much which diminishes their chances of currency trading success.

If you think about it, in currency trading how often do the really big trends come along? - Just a few times a year and these were the ones she hit hard, using her Forex trading signals.

3. Hit trades hard.

You hear a lot about diversification being the way to build wealth - but this lady held the view, that all it does is dilute your profits.

Therefore, she only focused on one trade - and piled as much money as she could afford into the position.

She then simply placed a monetary stop - and if she was wrong, she took her loss in good humour and waited for the next trading signal to come along.

4. Courage and Discipline

The trades she risked a lot of money on were only the trades she believed would be the big winners, and likely to pile up tens of thousands of dollars not a just a few hundred that many traders I know would be happy with.

Therefore, she let the trend develop and ignored short term volatility - and anyone wanting to learn Forex trading should do the same if they want big profits from forex trading

Her view, (which is right) was that most Forex traders want to make money - but lack the courage of their conviction - and cannot take accept a big profit.

They try so hard to protect their profit when they make one, which they move stops up too quickly - or grab their profit too soon.

Sometimes she would see her equity dip by thousands in a single day, but she stood firm. As she put it:

“I have my eye on the bigger prize” - and that was a profit target that was far bigger than most traders aim for or have the courage to hold on for.

Her currency trading system worked and it worked well, it wasn’t rocket science and it broke a lot of normal forex trading rules, but it worked.

She didn’t trade much, didn’t diversify, and didn’t trail stops quickly. However, thinking about it, isn’t that what the losing majority of traders do?

As she says: “Why join them? I’m making profits – Period.

If you trade in online currency markets, and want to make 100% annual gains - then maybe you should consider how she achieved them.

It makes total sense.

If you look at any currency trading system that is sold or one you back test then you will notice a startling fact – Over 95% of systems that work in back testing, fail to translate this success when trading for real in the forex markets.

This article is all about why and how you can back test and translate the back tested currency trading success into real time success.

Currency trading systems that work in back testing, which fail to work going forward in real time normally lose due to “curve fitting” or bending of the system rules to the data.

When you are back testing ANY system the temptation is their to “curve fit” the trading signals to make the system more profitable and many traders do this without even thinking about it.

So what actually is curve fitting?

Curve fitting involves tweaking rules and parameters so that they fit the data, making the trading system profitable.

A neat way to summarize curve fitting is:

Imagine shooting at a barn door, a then afterwards getting a chalk and drawing a bulls-eye around everyone!

In forex trading, traders try and get or improve profitability by adding unique rules and parameters, for different market conditions and different currencies and bending the system to fit the data.

Of course, the forex market will move differently in the future and you can’t bend going forward so, the system collapses in the brutal world of real time trading and losses.

If a system is based on sound logic, it should work regardless of the market conditions or the currencies traded.

Furthermore, the more elements or rules you put into a system, the more likely it is to break – you may think you are improving its profitability, but really all you are doing is increasing the odds of failure.

It’s a fact that most of the world’s top trading systems consist of just a few rules or parameters and these will work across ALL currencies.

When back testing a currency trading system, keep it simple.

Don’t be tempted to try and improve your trading signals with extra rules or parameters – the extra profitability is simply an illusion.

Just use a few parameters or rules, for all types of trading conditions and all the currencies you trade. You may not have optimum performance in simulation compared to a curve fitted forex trading system, but you will beat it hands down in the real world.

Don’t look for perfection look at the chances of making forex profits.

So now you know why those currency trading systems you see sold on the net, more often than not fail in real time trading.

Also, if you have devised a system yourself and scratched your head when it nose dived in real time trading, you know the answer and the danger of curve fitting.

Many traders like to use pivot points and moving averages but make fatal mistakes and don’t use them correctly, which ensures the indicators which can help their profitability actually causes them losses.

If you are using these indicators or thinking of using them, then learn now to use them correctly.

Here are some tips that will help you use these indicators correctly.

1. Don’t use them on meaningless data

More traders than ever are day trading and their losing.

The reason why is simple the time frame is to short and all volatility in daily periods is random and therefore NO technical indicator will give you any advantage, pivot points, moving averages, or any other indicator can help you make profits.

Ever seen a day trading vendor who has real time track record of profits?

You won’t!

Because it doesn’t work, volatility can and does, go anywhere in a day and traders lose – it’s as simple as that.

2. You can’t time entries with them!

Moving averages define the longer term trend; pivot points indicate points of rotation by definition, so they are telling you where prices may find support or resistance - nothing more.

Many traders like to simply wait for prices to reach the levels and enter their trades and then hope prices turn in the direction they anticipating, but if you rely on “hope” you will lose.

Never trade on “hope” trade with the odds in your favour.

This means when prices move towards the price levels you are looking at, you need to get the odds in your favour and that means combining them with momentum indicators to time your trading signals with the risk to reward I your favour.

You need evidence that price momentum is indicating the levels will hold.

If for example, prices move to support and price momentum turns up, you have the odds in your favour that support will hold and you can execute your trading signals.

Good momentum indicators are ones such as, the stochastic and Relative Strength Index (RSI) and if used with pivot points or moving averages, you have a powerful combination.

It’s all about combining indicators for profit – no indicator works on its own, so you need indicators that complement each other.

The Biggest Mistake any Trader Can Make.

Is to try and “predict” market direction. Most day traders do this as standard and most people who use pivot points and moving averages, who try and execute trading signals with them are doing the same.

You can’t predict turning points so don’t try – act on confirmation and you will increase your odds of success dramatically.

Keep in mind trading is an odds game not a game of guessing, hoping or predicting – if you remember that and use it to your advantage you can avoid a fatal mistake most forex traders make.