Top 3 Profitable Forex Trader Characteristics

Top 3 Profitable Forex Trader Characteristics -

Several studies of thousands of forex traders revealed some interesting characteristics of both profitable and unprofitable forex traders. The first characteristic is by far the most important.

1. Profitable Forex Traders Use Larger Timeframes

It has been proven over and over that long-term success requires long-term trading, but it turns out that this factor is even more important than the rest of a trader's strategy.

There is an extremely strong correlation between timeframe and profitability.

Learn Why Long-Term Trading is How to Win in Forex

Traders who focused on trends formed by 1 minute, 5 minute, 15 minute, and even 30 minute candlesticks were generally unprofitable over time, with smaller timeframes resulting in greater losses.

It is only those traders who focused on 1 hour candlesticks who begin to breakeven – meaning, even they are generally not profitable in the long-run.

Only traders who look at the bigger picture, by examining anything over 4 hour candlesticks, are profitable long-term. And the greater the timeframe used, the greater the chances of profitability, with 1 day and 1 week candlesticks offering the greatest success rates.

Larger timeframe candlesticks naturally corresponds to more long-term trading, which is the key to being successful in the forex market.

This correlation is so powerful, that traders with poor strategies who did this one thing right were typically profitable. After all, most currency pairs have huge trends that last for weeks or even months.

Following these mega-trends is the source of guaranteed profitability.

The bottom line:

  • Profitable Forex Traders Use Larger Timeframes (Greater than 1 hour candlesticks; trading long-term)
  • Unprofitable Forex Traders Use Shorter Timeframes (Less than 1 hour candlesticks; trading short-term)

Related: Stocks vs Forex: Why Trade Forex?

2. Profitable Forex Traders Use Low Leverage

Profitable Forex traders always use low leverage, typically below 10x leverage with some traders never going over 5x leverage. This obviously reduces the profitability of each individual trade, but it also significantly reduces the impact of losses.

In an overview of the characteristics of the repeatedly successful forex traders at OANDA (one of the most reputable forex brokers) low leverage stood out as a universal characteristic.

This makes sense, because high-leverage is a double-edge sword that accelerates gains but also escalates losses.

How can anyone expect to be profitable long-term when just one bad trade can blow up your account?

For example, the idea of gaining $500 on a single trade from a $2,000 account sounds enticing, but can you afford to lose -$500? That's a -25% loss in one trade if it goes against you.

This is why profitable forex traders use low leverage, because the double-edge sword of leverage escalates your losses. Leverage as low as 5x may not seem like a lot, yet businesses are considered to be OVER-leverage if their leverage exceeds 1.3x (not 13x, but 1.3x – not even 2x). Yet retail forex traders have access to at least 50x leverage.

To illustrate your loss potential at 50x leverage, consider:

  • -10 pips reduces your account by 5%
  • -20 pips reduces your account by 10%
  • -50 pips reduces your account by 25%
  • -100 pips reduces your account by 50%

Can you afford to lose -25% of your account on ONE trade? If you want to be profitable long-term then the answer is no, because this kind of loss scales:

If you have a $100,000 account and use 50x leverage, then you risk losing -$25,000 from a single bad trade!

The bottom line:

  • Profitable Forex Traders Use Low Leverage (Less than 10x; many use less than 5x)
  • Unprofitable Forex Traders Use High Leverage (Greater than 25x)

3. Profitable Forex Traders Are More Risk Adverse

Corresponding perfectly with the use of low leverage is the fact that profitable forex traders are more risk adverse than the majority.

Granted, trading in the Forex market is inherently risky to begin with, but of those traders who are successful, most of them have the characteristics of being more risk adverse than average.

After all, profitable Forex traders: [1] Use lower leverage (less than 10x), [2] Trade larger timeframes (which are inherently less risky than day-trading), and [3] They typically trade the more high volume currency pairs (like the EUR/USD).

Many profitable forex traders also follow the 2% rule, which is to never risk more than 2% of their account value on a trade. Now, that's not to say that their potential gain is only 2% as well – it just means they refuse to risk more than 2%.

For example, imagine that a trader intends to trade long-term for 2 to 10 days following a trend on the EUR/USD. If they have a $10,000 account and they intend to have an initial stop-loss of -80 pips (to allow for typical volatility), then they can only trade with a maximum of 250,000 units (which is $2.50 per pip) because the most they are willing to lose is 2% of $10,000 or $200 ($200/80 = $2.50/pip).

However, since they intend on following a trend for 2 to 10 days, their potential gain might be 240 pips, which would be $600. That's a 6% gain from an initial risk of 2%.

While this 240 pip trade might not seem that impressive due to the use of low leverage, a -2% loss also won't blow up your account. Not to mention that this same strategy with $100,000 would result in $6,000 gain from risking $2,000.

Ultimately, the 2% rule comes down to smart risk management and money management decisions, which the majority of retail forex traders lack.

The bottom line:

  • Profitable Forex Traders Are More Risk Adverse (Smart risk and money management)
  • Unprofitable Forex Traders Are Risk Seeking (Lack of, or poor, risk and money management)

Learn How to Win in Forex

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