I've been thinking a lot over the last 24 hours about R:R in forex accounts. I don't mean in the traditional sense - maximum risk on any given trade in relation to expected reward on that same trade. I'm thinking more about R:R in relation to my trading activity in its entirety.
I have read other threads in this forum where noobs like myself are asking what type of return they should realistically expect to see if they are successful. I am struck by the fact that the answers are all across the board. It seems that everyone enters this game expecting to get rich, but they eventually end up settling for some type of regular, modest return (assuming that they don't completely blow up their account and quit). I've also read comments from some cynics saying that if you are looking for 50%, 100%, or greater returns, you are probably being, at best, unrealistic and, at worst, greedy.
Like many people in this forum, I've lost money. I'm not ashamed to admit that. I'm also not ashamed to admit that my initial expectations were wildly optimistic. But I wouldn't be doing this if I didn't honestly believe that I will eventually turn this into an activity that far surpasses "traditional" investment returns. Just how high have I set this benchmark? I'm not sure - it's not absolutely defined yet, but I am convinced that anyone who settles for a modest return in this market is doing themselves a disservice.
We all know that forex is much riskier than most traditional investments. First, you might have to worry whether your broker will go out of business and take your funds with him. Then you have to master the Leverage Demon, always trying to maximize your returns without getting margin'ed out. Then you have the nature of the market itself - prone to massive swings and news announcements that move prices dozens, or even hundreds, of basis points in a matter of minutes.
My point is that if you are going to accept an inordinate amount of risk, then it should be because you are searching for an inordinate rate of return. This isn't being greedy. It's just being a sound business manager. Just as you must balance the risk/reward on any given trade, you must also balance the risk/reward on your overall trading activity and choice of markets.
Consider that in the US I can get a CD for ~5%. A CD is about the closest thing you can get to an absolute sure bet. Treasury bonds are basically a sure thing as well, and they pay slightly more (although you have to commit your money for a longer period of time). For slightly higher risk, I can put my money in an ETF. While this is not a sure thing, history tells me that I can expect an average annual return of more than 10% if I do this. Yes, there would be some down years, but overall my investment would grow year-over-year and there is almost no chance of losing large sums of money. Then there are mutual funds. Many mutual funds boast annual returns in the high teens, and the risk is still relatively low.
So if you are going to wade into the turbulent waters of forex, you should be gunning for returns that traditional investors would consider to be fantastic. Of course, you should expect this because you are also in danger of suffering horrific losses. But if you are gaining 5%, 10%, even 20% per year on your forex investment, I would seriously question whether you are receiving an adequate return for your risk.
Along these same lines, I don't think you should sell yourself short when evaluating trading styles and methodologies. Through massive backtesting I have managed to find a handful of methods that can consistently earn me a 5%-10% return on my forex money, but as I have described above, I don't think that this is a sound approach. Conversely, I sometimes wonder if I am spending too much time searching for my own Grail, throwing out profitable opportunities because I want something that is MORE profitable.
I believe the answer lies somewhere in the middle. Like the aging slugger who strikes out regularly while swinging for the fences, you'll go broke very fast if you are trying to hit a home run with every swing. But that doesn't mean that you have to settle for modest, "safe" returns. This is an incredibly risky game that we are playing and the only way to justify this risk is to know that you have a reasonable expectations of eventually earning very sizable returns.
Will I make $1M this year? Heck no. Will I even make ANY money this year? Well, at my current pace, that's in serious doubt. But I do know that as I learn more and I increase my trading savvy, the odds increase that I will eventually turn this around and have a banner week/month/year. The key is to apply sound MM such that I will still be in the game when my big week/month/year rolls around.
I have read other threads in this forum where noobs like myself are asking what type of return they should realistically expect to see if they are successful. I am struck by the fact that the answers are all across the board. It seems that everyone enters this game expecting to get rich, but they eventually end up settling for some type of regular, modest return (assuming that they don't completely blow up their account and quit). I've also read comments from some cynics saying that if you are looking for 50%, 100%, or greater returns, you are probably being, at best, unrealistic and, at worst, greedy.
Like many people in this forum, I've lost money. I'm not ashamed to admit that. I'm also not ashamed to admit that my initial expectations were wildly optimistic. But I wouldn't be doing this if I didn't honestly believe that I will eventually turn this into an activity that far surpasses "traditional" investment returns. Just how high have I set this benchmark? I'm not sure - it's not absolutely defined yet, but I am convinced that anyone who settles for a modest return in this market is doing themselves a disservice.
We all know that forex is much riskier than most traditional investments. First, you might have to worry whether your broker will go out of business and take your funds with him. Then you have to master the Leverage Demon, always trying to maximize your returns without getting margin'ed out. Then you have the nature of the market itself - prone to massive swings and news announcements that move prices dozens, or even hundreds, of basis points in a matter of minutes.
My point is that if you are going to accept an inordinate amount of risk, then it should be because you are searching for an inordinate rate of return. This isn't being greedy. It's just being a sound business manager. Just as you must balance the risk/reward on any given trade, you must also balance the risk/reward on your overall trading activity and choice of markets.
Consider that in the US I can get a CD for ~5%. A CD is about the closest thing you can get to an absolute sure bet. Treasury bonds are basically a sure thing as well, and they pay slightly more (although you have to commit your money for a longer period of time). For slightly higher risk, I can put my money in an ETF. While this is not a sure thing, history tells me that I can expect an average annual return of more than 10% if I do this. Yes, there would be some down years, but overall my investment would grow year-over-year and there is almost no chance of losing large sums of money. Then there are mutual funds. Many mutual funds boast annual returns in the high teens, and the risk is still relatively low.
So if you are going to wade into the turbulent waters of forex, you should be gunning for returns that traditional investors would consider to be fantastic. Of course, you should expect this because you are also in danger of suffering horrific losses. But if you are gaining 5%, 10%, even 20% per year on your forex investment, I would seriously question whether you are receiving an adequate return for your risk.
Along these same lines, I don't think you should sell yourself short when evaluating trading styles and methodologies. Through massive backtesting I have managed to find a handful of methods that can consistently earn me a 5%-10% return on my forex money, but as I have described above, I don't think that this is a sound approach. Conversely, I sometimes wonder if I am spending too much time searching for my own Grail, throwing out profitable opportunities because I want something that is MORE profitable.
I believe the answer lies somewhere in the middle. Like the aging slugger who strikes out regularly while swinging for the fences, you'll go broke very fast if you are trying to hit a home run with every swing. But that doesn't mean that you have to settle for modest, "safe" returns. This is an incredibly risky game that we are playing and the only way to justify this risk is to know that you have a reasonable expectations of eventually earning very sizable returns.
Will I make $1M this year? Heck no. Will I even make ANY money this year? Well, at my current pace, that's in serious doubt. But I do know that as I learn more and I increase my trading savvy, the odds increase that I will eventually turn this around and have a banner week/month/year. The key is to apply sound MM such that I will still be in the game when my big week/month/year rolls around.
