Why a KISS approach is often the best strategy when trading Forex

Why a KISS approach is often the best strategy when trading Forex

Aug 3 • Forex Trading Articles • 2886 Views • Comments Off on Why a KISS approach is often the best strategy when trading Forex

KISS; “Keep It Simple Stupid”, is a phrase many of us are familiar with, often the simplest solution is the most efficient and effective. As we’ve suggested in previous articles; novice traders always appear to regard trading as a difficult exercise, one in which we feel compelled to expel: blood, sweat and tears, in order to enjoy success.

We’re conditioned by a false mainstream media narrative and images which make trading look like a combat sport, as opposed to a cerebral exercise in: patience, diligence, research and precision. The reality is that less really can be more in trading. For example; we’d be far better employed pouring energy into concentrating on getting one trade in the market to work and be profitable, as opposed to juggling several trades and strategies, whilst elevating our stress levels by having many trades (on several pairs), in the market at any one time. Consider this hypothetical trading situation.

Let’s suggest that we commit to only trading one forex pair, EUR/USD and due to its popularity and high levels of liquidity, the spreads are generally the tightest available (certainly if you trade from Europe). Therefore, as a consequence of the liquidity, the chances of slippage are significantly reduced.

Now let’s take this scenario a stage further; we are a novice day trader and not only are we only going to trade EUR/USD only, we’re going to be a day trader, therefore we’ll never hold a trade overnight, and we’ll be limiting ourselves (through the placement of hard stops) to a loss of no more 2% per day. We’ll be risking 1% per trade, therefore if we lose two trades at our maximum loss, then we’ll stop trading for the day. Again, let’s move the strategy up a level; we’ll limit our gains to two winning trades per day and or two percent. If we hit a target of 1% gain on each of two trades then we’ll consider that to be an exceptional day and therefore we’ll consider our trading day to be over if we hit this target. We’ll shut our laptop, or small multi-screen set up down and enjoy the rest of our day.

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Now if you’re a novice trader, who has speculated wildly in your early career, it may be worth just taking a moment to consider how you now feel, knowing that you’re building a strategy in which you’ll be limiting your losses, they’ll always be limited to 2% per day. There’ll be no revenge trading, there’ll be no over trading, some days you might only take two trades and win 2%, some days you may take two trades and be closed out for the day. What’s important is that you’ve ring fenced your losses and built a strategy with realistic levels of profit achievement.

So what might be a typical busy day; would it be taking five trades with three winners and two losses? If so then we could be looking at 1% account growth per day, if the risk and take profit target on each trade is 1%. Now if you’re trading the EUR/USD only and on a day trading basis only, actually taking five trades might be considered excessive. The probability is that we’ll take trades linked to medium to high impact news events and only see three opportunities per day, when we’re day trading.

So in terms of our positive expectancy we’d be looking for two wins and one loss. Perhaps we’d be taking fifteen trades per week, with ten wins and five losses. That would return us a quite spectacular return of 5% growth per week, which many would consider to be completely unrealistic. So let’s apply some realism using our fifteen day trades per week maxim, but this time we’ll suggest that our losses will be to the full one percent but the gains will on average be 0.7% account growth. Therefore we’ll be looking to make 2% gain per week; 5% losses countered by 7% winners. A simple, effective, realistic approach to setting goals, should always form part of trading plan.

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