Science of Getting Rich with Forex

Trading Discussion
1

Greetings all,

I’m here to talk about the science of getting rich in the Forex Market. This is mainly for beginners, but everyone can benefit from this knowledge. My experience rests in my studies of psychology. Forex has been a hobby of mine for some time, also. This article is to help those just beginning or those who have failed in the market before.

We all know that the Forex Market carries the potential for extreme gains but also extreme losses. The vast majority of Forex investors end up blowing their accounts. Only 5% succeed in Forex. Why is this?

Is it because they have a really good trading system? I don’t think so.
Browsing this forum will grant you access to a myriad of trading systems. Some are relatively simple and rely on just a few indicators, while others are so complex that it takes days just to comprehend when to place a trade.

Just think of all the indicators that come standard with your trading platform. We have moving averages, bollinger bands, parabolic SAR’s, fractals, MACD’s…you name it!

With all these public forums and exchanging of trading systems, Forex trading should be getting easier and easier. Everyone should be making money with Forex in this day and age! But, is this the case? NO! Only a fraction of traders are actually making money with Forex on a consistent basis. Why?

Below, I’m going to outline the top reasons most Forex traders fail:

  1. Poor Money Management

This is probably the number one reason most traders fail. Poor money management techniques can ruin even a good trading strategy. On the flip side, even a poor trading system can be successful with good money management strategies.

  1. Deviating from your own trading method

A lot of traders have a successful trading method yet still end up bankrupt. Why? Because they failed to follow their own trading method! In the heat of day trading, their emotions got the best of them. Maybe they placed a very risky trade or stopped using a stop/loss, something took place where they started taking unnecessary risks and deviating from their own plan! Those few trades that they placed in the heat of the moment turned against them. Next thing you know they are being stopped out and clenching their fists in anger. All their profit and initial capital has been wiped out by just a few unfortunate trades.

  1. Greed

This ties into both reasons above. People are impatient. They hate waiting for things. They want instant gratification. These problems are instantly multiplied with something as lucrative as the Forex Market. Profit potential is essentially unlimited. Greed causes people to behave irrationally. There is a fine line between placing trades intelligently and gambling! If you trade with the mentality that you want to get rich by next weekend, you’re going to lose in the long-haul.

Does any of this sound familiar? Maybe you have heard it all before?

If none of this is new for you, then let me ask you a very brutally honest question — Why aren’t you rich yet?

If you actually apply these principles and trade forex conservatively, you will be rich in the long-term. Here’s how to do it:

  1. Come up with a money management strategy.

As a rule of thumb, never risk more than 2% of your account per trade. That way, if a trade moves against you, you will not blow your account. This is extremely important! You have to calculate your losses into your strategies. Nobody wins every trade in the forex market. If they tell you otherwise, they are trying to sell you something (which I will never do!). What if you could come up with a strategy that allowed you a set number of losses per day or month? The trick is to minimize the effect of each loss and calculate that into your trading strategy. Remember, the goal is to trade forex conservatively and accumulate your income slowly over time. Losing a little bit every now and then is perfectly okay, as long as you have all ready figured that into your strategy. Plan your losses!

Another idea is to cap the potential loss of equity each month. Most people recommend 6% per month. If you lose that much, you should stop trading until next month. Personally, 6% seems a little low. This all depends on your risk appetite as well. You could increase this amount slightly, but I would not go above 10% per month.

We’ve covered how much you can lose per day/month, but what about profits? What should we aim for with our T/P? This is an important question. It all depends on your risk/reward ratio. What do I mean by this? The Risk/Reward ratio is basically how much of your account you risk in comparison to how much you could potentially gain with each trade. So, for example, you might have a R/R ratio of 3:1, which means that 3 Losses will take away 1 Successful trade.

For example, the S/L could be 100 pips while the T/P could be 300 pips.

If we have a 3:1 ratio, all we have to do is guarantee that our trading system will work 26% of the time and we can generate a fortune over time! Think about it – as long as we get a little over 1/4 trades as winners, we will be growing our account slowly.

Do you realize how easy it is to get 26% of your trades right? Most systems are better than chance (meaning > 50%).

Your risk/reward ratio can be changed to anything. Common values are 1:1, 2:1, 3:1, 4:1, etc. Nobody that I know of trades with extreme values like 50:1 or 100:1 (although it’s certainly possible).

The important thing is to ensure that your trading strategy, whatever it might be, matches your risk/reward ratio. If the risk/reward ratio and trading system are in harmony, and you are applying proper money management strategies, you will get rich over time.

Conservative trading with Forex seems like you are taking the slow route to earning any money. Most people abhor the idea of trading small lots and using S/L. In actuality, conservative trading with Forex will make you richer than you ever imagined and faster than you ever thought possible.

If you have an excel sheet, open it and do some simple calculations. Start with a small balance and small lots. Average a small number of pips per month (1000 is certainly possible). Slowly increase your lot size as your account grows. Watch as your money snowballs into a mountain of gold!

It would be very easy to take an ultra conservative trading approach and, while applying strict money management principles, transform 200 dollars into millions in 5-10 years. Again, do the math if you don’t believe me.

So here is my advice for you:

Sit down and play with the numbers. Work out a plan that aims to conservatively grow your account over time. Calculate a risk/reward ratio that makes sense to you. This should reflect the success and style of your trading system. If your trading system works at well above chance levels, then your R/R ratio should reflect that (and should be closer to 1:1 or 2:1).

If you need help finding a trading system, browse these forums. My general rule of thumb is to keep it as simple as possible. The nature of the trading system dictates your risk/reward ratio. If it’s a scalping strategy, set a 1:1 R/R ratio. If it’s a long-term, position based strategy, set a higher R/R ratio, such as 4:1.

Remember, if your R/R ratio is 1:1, you just have to do better than chance (51%) to make a fortune over time.

Keep in mind to never risk more than 2% of your account per trade and between 6-10% equity each month.

Once you have your plan fully worked out, use a demo account to test it for a few months. It’s important to never deviate from your plan! Do not get greedy at the last second because you are “on a hot streak”.

This may seem like very basic knowledge, and it is. In fact, this is as basic as you get. So why am I writing this? Because no one seems to be actually applying these principles. If they did, they would be rich by now. :slight_smile:

It has been said that a lack of planning is the cause of all failures. That’s a pretty bold statement, but it’s entirely true. Very few forex traders plan their losses. Perhaps they believe they are immune - that their system is invincible to the whims of the market. If so, they will either be the richest person in the world one day or they will be penniless (I’m betting on the latter).

Remember, slow and steady wins the race. Think of a snowball rolling down a snow-packed hill in Colorado. The ball is tiny at first. It keeps rolling and rolling but never seems to go anywhere. Then, it grows just a tiny bit and picks up some momentum. Slowly, the ball gets bigger and bigger and starts rolling faster and faster. Before you know it, the snowball is massive and unstoppable.

It can be the same way with your forex account. I truly believe that one could live very, very comfortably by trading forex for a living. Just stick to your principles.

Quit aiming for 1000 pips an hour! It’s just not practical. And, unfortunately, there is no such thing as a silver bullet. If there was, the developer would never sell it to you! Think about it – why would he? An EA that worked consistently would be priceless.

Instead of searching fruitlessly for the silver bullet, invest that time into finding a simple trading system that works at least SOMETIMES. Then, study it and see how many pips it can grab on average when it’s right. Then calculate the R/R ratio and go from there.

This article is meant to guide those who need guidance. We all wonder astray from time to time. The trick is to get back on the horse and keep it simple. Never trade on your emotions and stick to your plan. It’s as simple as that. Never make something more complicated than it needs to be.

Thanks for your time. Sorry for the long post.

I look forward to hearing from you all!

To our success!

DISCLAIMER

Any advice given here, in this thread, is purely speculative and is solely my opinion. The information presented here is for academic purposes only. Forex carries the potential for big profits but also for big losses. Given this substantial risk factor, only trade with money you can afford to lose.

2 Likes
2

While your advice is certainly fine, albeit stated here at least 20 times a day, i must clarify something you said ----

the true statement is that 95% of all NEWBS WASH OUT — leaving only 5% to continue on as TRADERS and not newbs.

there is a significant difference in those two statements, as you have to also remember how many people WASH OUT of football teams, cheerleading, rock bands, lawyers and indian chiefs — forex, like ANY financial trading instrument is a whole new world, with a whole new culture, language and rules, and woe be to the ones who DO NOT learn how to navigate those waters.

of course, the 5% who DO make it then face some uphill challenges to make it BUT, the rewards are tremendous for those who are not mere dilletants at the game, but sincerely interested in MASTERING and making forex work for THEM !

much later, the simple rules you have presented become moot points, but that is a few years down the road, once you know the rules to break !

enjoy and trade well

mp

[I][B]Within the great hall at Elfinore stands a wondrous coffer, precisely four cubits square and securely latched against the outside world. Inside that repository, shut away from impertinent eyes, abides many an intriquing trading secret garnered from around the world and over the ages !

As a child, i used to watch from the darkness as the secrets were debated and annotated by the elders. No one there held a single thought of my presence – BUT I KNOW WHERE THEY HID THE KEY !![/B][/I]

3

Hello,

That’s a fine point. I think it’s difficult to clearly define “newb”, however. There will always be someone with a better trading system and with more trading experience than yourself. Is a newb someone who is just starting out in forex, or is it someone who is simply misinformed and uses a flawed system?

We are contrasting here someone who is simply inexperienced compared to someone who is simply misinformed.

Everyone was once a Forex rookie, no matter how successful they are today. Your argument is an interesting one and is more complex than you may have thought.

Your argument has some interesting implications. It assumes that virtually everyone fails in the beginning and that that is simply a part of the learning process. After those initial failures, newbs gain enough experience and knowledge to successfully enter the coveted 5% realm with the other successful traders.

I’m not so sure about this. I’ve heard many horror stories about people that continually blow their accounts and dispel it as simply bad luck. I’m not so sure that experience alone can make one successful in the markets. I think there are many people out there who have these colossal misconceptions from the beginning and through all their experience they never really shed those beliefs. They still cling to the get-rich-overnight ideals that caused them to enter the market in the first place. They don’t calculate anything or use any S/L, they just place their orders and hold on for dear life! A few mild successes and they are convinced they know what they are doing. Then they start to up the ante and so on, until they place those few unfortunate trades that demolish their account.

What I stated in my article is very common and popular. Just search around and you’ll find very similar advice all over the place. Although it’s commonly stated, I don’t think it’s commonly applied.

My point with the article was that people just starting out in Forex should not get lost in the virtually endless sea of details out there. Instead, they should formulate a simple plan and stick to it no matter what. Discipline can take you a long way.

But you are absolutely right; that advice is a dime a dozen. I just hope people adhere to it because it’s absolutely on the mark.

Thanks for your comment. That’s a lot to think about.

Take care!

4

defining “newb” is not considered a difficult situation in the least — it consists mostly of the word “new”

many people fail for many reasons, which ive gone into far more often than needed.

when referring to learning to, and becoming accomplished at, then the 5% figure stands.

navy seals have a wash out rate approaching this, although the green berets are an easier berth with a lesser percentage of wash outs, and what your highschool teams statistics are, i do not know, but they wash out a few dozen per year, probably approaching 50% of applicants.

and of this coveted 5%, it includes those who actually trade and make profit and while some may BLOW their accounts, in the world of forex, like most other things, theres always someone right behind you to take your place, and to keep the statistics level !

now, when you talk of NO stop losses, there must be a finger somewhere pointing at me, cause thats EXACTLY how i trade, and while ive been told forever that i will blow my account “someday”, many a year has passed and the “old man who blows accounts” hasnt stopped by my trading desk yet !

of course, the methods i use are from years of rather successful trading, and i constantly warn newbs NOT to try this till they are MUCH further on in their education and experience, but for the more advanced trader who IS a trader in all ways, it is offered up, although by then its probably no longer used anyway !

[B]EXPERIENCE — try to do ANYTHING well without it, and thats all i have to say about that ![/B]

now, not using any sl, and only working from experience, ive gotten over 100 pips — i shall return to TRADING at this point !

enjoy and trade well

mp

[I][B]Within the great hall at Elfinore stands a wondrous coffer, precisely four cubits square and securely latched against the outside world. Inside that repository, shut away from impertinent eyes, abides many an intriquing trading secret garnered from around the world and over the ages !

As a child, i used to watch from the darkness as the secrets were debated and annotated by the elders. No one there held a single thought of my presence – BUT I KNOW WHERE THEY HID THE KEY !!

[/B][/I]

5

Hello,

I’m curious about your strategy. You said you trade with no S/L, but you’ve never blown your account. Do you trade small lots? What about drawdown? Any close calls?

I think the S/L depends on a lot of factors. If you have a large account balance and trade a conservative lot size, then you can be sure a good percentage of the time that your trade will eventually bounce back, especially if it’s in line with the H4 or Daily trend.

Otherwise, you could be playing with fire in my opinion. But I guess it just all depends on whether you feel lucky. Well, DO YA PUNK? :smiley:

6

what i do is laid out in my thread, but essentially youre fully correct ---- i trade the trend, using the LRC and some very accurate indicators and have a particular knack at finding reversal points.

Lot size are always full, and i short anything that may be a drawdown, although hopefully, ive already exited the play and if not, the short covers my margin as a hedge.

and as one of the biggest punks on this board, LUCK has nothing to do with it cause i count how many bullets Harry has left !

LOL

come visit

mp

7

Hello again,

I’m curious about the indicators you use. What’s the LRC?

Where is exactly is your thread?

Thanks again,

FP

8

the LRC stands for linear regression channel, which has some nice things about it but can be considered a price channel showing the historical top, middle and bottom of any timeframe — excellent for trading in a number of ways, it serves to show the movement of the price and becomes extremely prophetic because of that !

my thread is MP – not so secret secrets, or something like that — just look for the MP.

mp

9

http://forums.babypips.com/newbie-island/18177-mp-some-my-non-secret-secrets.html

Come on over and find out if you are right or left brained.

10

The LRC seems interesting, but tedious to set up, no?

Has it worked out well for you? Do you still use it? Is it your sole indicator?

A few questions for you :smiley:

-ForexPhantom-

11

Greetings,

I wanted to discuss an important concept called “compounding”. Essentially, compounding is a powerful way to grow your account very quickly (which is what we all want!).

Einstein once remarked that compounding is the most powerful force in the world!

In forex, the best way to demonstrate compounding is to show you an example WITHOUT compounding first.

Starting balance: $1,000
Equity Increase: 25% / Month
Non-Compounding means that we try to gain $250 dollars each month.
Balance after 5 years: $15,750

Now let’s look at the power of compounding!

With compounding, we take our new account balance into effect each time BEFORE the equity increase. So $250 will be our first month’s goal, and following that it will be 1,250 *.25 = 313…and so on for 60 months total.

Starting balance: $1,000
Equity Increase: 25% / Month
Balance after 5 years: $522,024,357

That is around 33,144 times more money than when you don’t compound your equity increase.

Okay, so now we know we should compound our account, but how do we do that!??

Simple. You simply have to create a trading plan and stick to it.

Aim for a certain percentage of equity increase per month. 25% is certainly possible in the wild world of Forex, but you could make yours lower, of course.

Once you have that determined, open up an excel spread sheet and start crunching numbers.

The goal should be to create a system which requires a minimum number of pips per month while factoring in an ever increasing (yet appropriate) lot size.

For example:

Suppose you want 1 Million Dollars with the next 3 years and you only have $1,000 dollars starting capital.

A 25% increase in equity each month WITH THE POWER OF COMPOUNDING will make this a reality, but you have to increase your lot size at the right times so that you can factor in the spread.

It’s also a good idea to set a S/L for 2% on each trade. Factor that in as well when determining your lot size.

A good trading plan will call for only 10-12 trades per month at around 20-30 pips apiece. This means that you can only place orders on the BEST signals and be very SELECTIVE.

A trading plan gives you immediate goals and long-term ones as well. This ensures that you always stay on track and you know exactly what you need to do, day-by-day and month-by-month.

-ForexPhantom-

1 Like
13

The Science of Risk Management and capital increase.

Well if one keep on increasing it’s equity while same times increase it’s Lot Size of purchase. It just keep u at the same Risk of Start, and increase your profit with New Equity Calculation.

Risk Facing :

  1. Risk never reduce over times. U always have the same risk setting
  2. Trend and indicator might is not an absolute sign as market if fractal.

Advantage :

  1. Profit increase over times, but is it too slow ?

So for my own create of Science Theory - Mathematic Statistic Science Transform.

  1. Risk need to reduce over times. And how u do that ? By follow step 2.
  2. Do not increse size lot when equity gain. And how U get good profit ? By follow step 3
  3. Using an EA that able give U 100% Return of Investment in 2 Days Less than 4 Days.

By using Mathematic Statistic and possiblity stratergy. My EA did not use indicator, it always open trade by hedging long and short, when it reach the statisic of profitable basket trade. It close all trade and restart it formula of statistic again. So it trade none stop as long the market in statistic trend no matter up or down.

If you intersted to find out how my Mathematic Statistic Theory work out. Visti my post at 301 Moved Permanently
Here got snap shoot of demo. Is a new EA so still in demo testing.

14

there is a custom indicator that does the work for you, but what interests me most is the word “tedious” that you choose to use.

forex can supply one either an very nice augmentation to available salary, or a completely new vocation that is recession proof, requires no stocking of inventory and only a few hours of work per day — to believe that something might be “tedious” reveals a thought process that appears more that it is wishing for a “holy grail” approach to forex, than one of true interest.

that is only MY observation, but if anything ive said rings true, please examine all your motives for wanting to trade forex, because it is NOT a get rich quick scheme unless you START with a few hundred thousand dollars already — then, money breeds money !

che

15

Good post. Forex is definitely not a get rich quick scheme. However, even with conservative betting and small risks, Forex can yield substantial profits in a relatively short amount of time.

It is entirely possible to start with $1,000 and be a millionaire within 5 years. Remember that is with CONSERVATIVE betting, not risking hardly any of your account on each trade and only aiming for 250 pips / month.

It’s not a hard target to reach, but I’m still trying to come up with the most efficient and least risky way to do it (aren’t we all?).

Anyways, I agree with you. Trying to become rich overnight will only lead to heartache…unless maybe you can make 1,000 trades with huge lots and win all of them magically (dreamworld!)…

“Tedious” was simply my initial thought with that indicator. Many indicators require little manipulation and are still very effective. It appears that this LRC indicator requires all sorts of complicated line drawings and complex calculations. I prefer to keep things very simple, so it may not be for me. Seemed like a lot of trouble when I could just use some EMA’s and RSI and MACD.

Take care,

-ForexPhantom-

16

ForexPhantom:

Have you gotten rich with Forex?

17

Not yet. I have never done it with real money. I’m getting ready to start graduate school and I’ve got some big family issues going on right now. Basically, life is too hectic for me at the moment. Plus I don’t have much money to invest.

But, I will definitely be using real money in the fall of this year.

Until then, I am rigorously tweaking my strategy so that when that time comes, there will be no guesswork.

I will succeed in the market because of sound money management and low-risk trades. I’m going to use the smallest lot size available and have loads of cushion available (800 pips+ leeway). I will trade only on the 1HR chart and ABOVE.

Essentially, I’m going to be the most conservative trader imaginable. That way, even if I lose, I’ll be losing at the most, say, 20 bucks. Not exactly devastating.

I’ll slowly grow my account and make consistent, small gains. Once I increase my equity a certain amount, I’ll slowly increase my risk. My risk will evolve over time and adapt to my equity.

That’s my theory, anyways. :smiley:

-ForexPhantom-

18

to be honest, all that is required to use the indicator is dropping it into your indicator folder, and nothing more.

but also understand, while a complete and accomplished system in its own right, mp used it to provide a VISUAL picture of where the currency was, where it had been, and where it was heading.

in any timeframe, its more like radar than anything else — it simply SHOWS you where you are in the price world, and if you know that, you know where to bet on its going, and can most likely give the time it arrives !

che

19

Cool!

You have been successful in using the LRC?

I had trouble initially with it and still do. I’m gonna fool around with it some more.

Can it be used on the DAILY charts??

Thanks,

-ForexPhantom-

20

oh, here - - - - - let me help

EXTREMELY helpful on the daily, and you can learn tons more over at “mp – my non secret secrets” or whatever its called === seems to be a pretty popular thread what with mp getting banned every other day

che

SHI_Channel_true.zip (5.38 KB)

21

Is that simple enough for you?

http://forums.babypips.com/newbie-island/19645-macd-strategy.html

It’s some kind of 1:1 Ratio BUT, you trade in the direction of the trend.

So, when you’re wrong, it’s because the trend change just before you get in. (serious bad luck)

If so, it’s not over, you change your way too. You’ll lose some money on the way, of course, but never more then 30pips a trade.

Ok, why 30 pips?
After some test (on the 5 mins chart) I saw that very often, following the MACD Strategy, the price went down for a short period of time, most of the time NOT UNDER 30 pips. But it does go down 12/18/22pips to move up again to reach 30, 40 or sometime even 80 pips of profit. So a too tight Stop Lost (say 10 or 20 pips) could stop you from doing real good money. Think about it, if you’re SL is too tight it will trigger every single trade.

Ok, I did it with REAL money myself.

What happen? I lost some money, around 600$ in about 4 trades. So I just stop. And then, just as I stop, the damn thing start to pay off.

So I went REALLY unlucky at the start…

Take a look at your chart. Set the MACD and study the price movement and apply “mentally” the little basic MACD strategy.

Could pay real good I think with real good discipline.

I got burn once and so, Iam a bit “scare” to do it again…

If some of you try this, or simply improve the MACD strategy, please, just let me know. You can send me a private messages or just a reply in this thread or the other “MACD Strategy”.

Thanks.

P.S: Doing the very same thing with 20pips profit and SL at -10pips could be an interresting thing to try too on the 1 mins chart.