There are three factors to define whether or not you're going to make consistent profit or not:
- Win Rate: what percentage of all your trades are profitable in the long-term.
- Reward to Risk: money-wise, what is the proportion of your profits to your losses.
- Win-Lose sequence: how you losses and wins are lined up.
Before I start, allow me to show you something interesting. Attached, you can find three charts drawing in blue lines. Guess what time frame they are drawn in and try to identify key levels only by looking at them with naked eyes.
OK, don't go any further. They are NOT charts at all. They are RANDOM numbers produced by spread sheet applications; absolutely random. Still, some of you may call some levels as resistance/support, some others may identify some Fibonacci levels on it and guess what? You can draw trend lines, moving averages, channels, ... on it and then begin to analyse it!!! But one thing still persists: these are RANDOM numbers and nothing else.
So, are we, traders, really flipping a coin and expecting consistent profit? Not actually! Forex is a bit better than a toss game because the numbers are procured by humans and not machines and we humans know each other, don't we?
What I am trying to say is we don't have ANY control/knowledge of the next move of the market. We just possess some "Edges" to guess when a market may act in a certain direction. But when it acts, how long this reaction will last? we don't know. In other words, we may guess more than 50% of the time when and where a market may behave in certain ways, but we absolutely have no idea of the destination (i.e. take profit points). We also have no clear idea of when to admit we've been wrong (i.e. stop loss points).
Here, the challenge shows. more than 80% of the time (in my estimate) traders are discussing about a good strategy to find the best reversal/continuation points to enter into a position. BUT where's the TP/SL? If you have no pre-determined, statistically winner strategy, you're loss is only a matter of time. YOU WILL LOSE sooner or later. I personally hate things like trailing stops, next zone targets etc because they don't offer a clear method to measure your Reward to Risk ratio or Win Rate. Some the next zone is 45 pips away from you and other times 150 pips.
I personally have already back-tested many many strategies by either fully or partially computerised methods and most of them don't offer a win rate of 50%-55% at most. But is 50% a good rate? It completely depends on your Reward to Risk ratio. Can trailing stops and next-zone methods be a reliable method to gauge this ratio? absolutely not.
You may think I am over-analysing things, maybe so, but unless I have found a robust, reliable, back-tested strategy I am not going to put a million dollar on my account
By the way, the next time you see someone talking about his achievements, take a look at the pictures I've attached to this post. Even a blind computer producing blind number can be in profit for considerable amounts of time. But is this reliable? I doubt it...