TRAITS OF SUCCESSFUL TRADERS:

a four part series

Research & Analysis: DailyFX

Over the past several months, the DailyFX research team and the DailyFX trading instructors
have been closely studying the trading trends of FXCM clients, utilizing trade data from FXCM
accounts. They have gone through an enormous number of statistics and anonymized trading
records in order to answer one question:

“What separates successful traders from unsuccessful traders?”

With this unique resource, they were able to distill some of the “best practices” that successful
traders follow, such as the best time of day, appropriate use of leverage, the best currency pairs,
and more. And in this four part series they will share with you four of the most important traits that
most successful traders have.

We hope that this series will help you become a successful trader too.

-FXCM Inc.
Table of Contents

5 Part One: What is the Number One Mistake Forex Traders Make?
5 Summary
6 Introduction
6 What does the average forex trader do wrong?
8 Cut your losses early, let your profits run
8 How to Do It: Follow one simple rule
9 Stick to Your Plan: Use stops and limits
10 Does this rule really work?
12 Game plan
13 Resources

14 Part Two: When is the Best Time of Day to Trade Forex?

14 Summary
15 Introduction
16 Does the time of day that I trade matter?
17 What about other currency pairs?
19 Game plan
20 Resources

21 Part Three: How to Trade the Majors During Active Hours

21 Summary
22 Introduction
23 What strategy should I use to trade the US daytime?
24 What is a breakout?

2
24 How do you trade breakouts?
25 Sample Strategy: Channel breakout
27 When should I look to trade breakouts?
28 Game plan
29 Resources

30 Part Four: How Much Capital Do I Need to Trade Forex?

30 Summary
31 Introduction
31 A likely culprit
33 How much “effective” leverage should I use?
34 Adjusting “effective” leverage to suit your risk tolerance
36 Game plan
37 Resources

38 Appendix
38 Appendix 1.1
38 Appendix 1.2
38 Appendix 1.3
39 Appendix 1.4
39 Appendix 2.1
39 Appendix 2.2
39 Appendix 2.3
40 Appendix 2.4
40 Appendix 2.5
40 Appendix 3.1

3
41 Appendix 3.2
41 Appendix 3.3
41 Appendix 3.4
41 Appendix 3.5
42 Appendix 3.6
42 Appendix 4.1
42 Appendix 4.2
42 Appendix 4.3

43 Disclaimers
43 High risk investment warning
43 DailyFX Release of liability
43 Hypothetical performance and backtesting risks
43 Leverage risk warning

4
 TRAITS OF SUCCESSFUL TRADERS: PART ONE

What is the Number One

Mistake Forex Traders Make?
..................................................................................

Summary: Traders are right more than 50% of the

time, but lose more money on losing trades than
they win on winning trades. Traders should use stops
and limits to enforce a risk/reward ratio of 1:1 or
higher.

5
TRAITS OF SUCCESSFUL TRADERS: PART ONE
What is the Number One Mistake Forex Traders Make?

Profitable Trades by Currency Pair

80%
71%
70% 66%
62% 64% 64%
59% 60% 60% 61% 61%
60% 58% 59%
57%
54%
50% 49%
40%
30%

0%
NZD/USD EUR/GBP AUD/USD EUR/JPY USD/CAD GBP/USD GBP/JPY
AUD/JPY USD/JPY EUR/USD USD/CHF EUR/AUD EUR/CHF GBP/CHF AUD/NZD

CHART 1.1
Percentage of trades that closed with a profit
Source: Appendix 1.1

INTRODUCTION
Big US Dollar moves against the Euro and WHAT DOES THE AVERAGE FOREX TRADER
other currencies have made forex trading DO WRONG?
more popular than ever, but the influx of new Many forex traders have significant experience
traders has been matched by an outflow of trading in other markets, and their technical and
existing traders. fundamental analysis is often quite good. In
fact, in almost all of the most popular currency
Why do major currency moves bring pairs that FXCM clients trade, traders are
increased trader losses? To find out, the correct more than 50% of the time.
DailyFX research team has looked through
amalgamated trading data on thousands of
FXCM live accounts. In this article, we look
at the biggest mistake that forex traders
make, and a way to trade appropriately.

6
TRAITS OF SUCCESSFUL TRADERS: PART ONE
What is the Number One Mistake Forex Traders Make?

Chart 1.1 shows the results of a data set of So if traders tend to be right more than half the
over 12 million real trades conducted by time, what are they doing wrong?
FXCM clients worldwide in 2009 and 2010.
It shows the 15 most popular Chart 1.2 says it all. In blue, it shows the
currency pairs that clients trade. average number of pips traders earned on
profitable trades. In red, it shows the average
The blue bar shows the percentage of trades number of pips lost in losing trades. We can
that ended with a profit for the client. now clearly see why traders lose money
For example, in EUR/USD, the most popular despite being right more than half the time.
currency pair, FXCM clients in the sample They lose more money on their losing trades
were profitable on 59% of their trades, and than they make on their winning trades.
lost on 41% of their trades.

Average Profit and Loss per Trade (in pips)

140
127
122
120
112 110 105 102
100 98 96 90 90 89 84
80 78
65 63
60 61 60 60
60 53 54
52 50 49 47 48 51
44 43
40
30
20

0
EUR/USD USD/JPY GBP/USD EUR/CHF AUD/NZD EUR/AUD USD/CAD EUR/GBP
GBP/JPY GBP/CHF EUR/JPY AUD/USD USD/CHF NZD/USD AUD/JPY

CHART 1.2
Average profit and loss per trade in pips
Source: Appendix 1.2

7
TRAITS OF SUCCESSFUL TRADERS: PART ONE
What is the Number One Mistake Forex Traders Make?

Let’s use EUR/USD as an example. We know later, if appropriate. It is better to take a small
that EUR/USD trades were profitable 59% of loss early than a big loss later. Conversely,
the time, but trader losses on EUR/USD were when a trade is going well, do not be afraid to
an average of 127 pips while profits were only let it continue working. You may be able to
an average of 65 pips. While traders were gain more profits.
correct more than half the time, they lost
nearly twice as much on their losing trades as This may sound simple – “do more of what is
they won on winning trades losing money working and less of what is not” – but it runs
overall. contrary to human nature. We want to be
right. We naturally want to hold on to losses,
The track record for the volatile GBP/JPY pair hoping that “things will turn around” and that
was even worse. Traders were right an our trade “will be right”. Meanwhile, we want
impressive 66% of the time in GBP/JPY – to take our profitable trades off the table early,
that’s twice as many successful trades as because we become afraid of losing the
unsuccessful ones. However, traders overall profits that we’ve already made. This is how
lost money in GBP/JPY because they made you lose money trading. When trading, it is
an average of only 52 pips on winning trades, more important to be profitable than to be
while losing more than twice that – an right. So take your losses early, and let your
average 122 pips – on losing trades. profits run.

CUT YOUR LOSSES EARLY, HOW TO DO IT: FOLLOW ONE SIMPLE

RULE
LET YOUR PROFITS RUN You can help avoid the loss-making problem
described above by following one simple rule:
Countless trading books advise traders to do
always seek a bigger reward than the loss
this. When your trade goes against you, close
you are risking.
it out. Take the small loss and then try again

8
TRAITS OF SUCCESSFUL TRADERS: PART ONE
What is the Number One Mistake Forex Traders Make?

This is a valuable piece of advice that can be the risk/reward ratio you choose, the less
found in almost every trading book. Typically, often you need to correctly predict market
this is called a “risk/reward ratio”. If you risk direction in order to make money trading.
losing the same number of pips as you hope
to gain, then your risk/reward ratio is 1-to-1 STICK TO YOUR PLAN: USE STOPS AND
(sometimes written 1:1). If you target a profit LIMITS
of 80 pips with a risk of 40 pips, then you Once you have a trading plan that uses a
have a 2:1 risk/reward ratio. If you follow this proper risk/reward ratio, the next challenge is
simple rule, you can be right on the direction to stick to the plan. Remember, it is natural for
of only half of your trades and still make humans to want to hold on to losses and take
money because you will earn more profits on profits early, but it makes for bad trading.
your winning trades than losses on your We must overcome this natural tendency and
losing trades. remove our emotions from trading. The best
way to do this is to set up your trade with
What ratio should you use? It depends on the Stop-Loss and Limit orders from the
type of trade you are making. You should beginning. This will allow you to use the
always use a minimum 1:1 ratio. That way, proper risk/reward ratio (1:1 or higher) from
if you are right only half the time, you will at the outset, and to stick to it. Once you set
least break even. Generally, with high them, don’t touch them (One exception: you
probability trading strategies, such as range can move your stop in your favor to lock in
trading strategies, you will want to use a low profits as the market moves in your favor).
ratio, perhaps between 1:1 and 2:1.
For lower probability trading strategies, such Managing your risk in this way is a part of
as trend trading strategies, a higher what many traders call “money management”.
risk/reward ratio is recommended, such as
2:1, 3:1, or even 4:1. Remember, the higher

9
TRAITS OF SUCCESSFUL TRADERS: PART ONE
What is the Number One Mistake Forex Traders Make?

The Importance of Money Management

10K

8K
Without stops/limits
6K With stops/limits

4K

2K

-2K

CHART 1.3
Hypothetical returns* from a basic RSI strategy trading USD/CHF (12/14/01 - 03/27/11)
Past performance is not indicative of future results
Source: Appendix 1.3

Many of the most successful forex traders are The 2 lines in the chart show the hypothetical
right about the market’s direction less than returns from a basic RSI trading strategy on
half the time. Since they practice good money USD/CHF using a 60 minute chart. This
management, they cut their losses quickly system was developed to mimic the strategy
and let their profits run, so they are still followed by a very large number of FXCM
profitable in their overall trading. clients, who tend to be range traders. The
blue line shows the “raw” returns, if we run
DOES THIS RULE REALLY WORK? the system without any stops or limits. The
Absolutely. There is a reason why so many red line shows the results if we use stops and
traders advocate it. You can readily see the limits. The improved results are plain to see.
difference in Chart 1.3.

10
TRAITS OF SUCCESSFUL TRADERS: PART ONE
What is the Number One Mistake Forex Traders Make?

Our “raw” system follows FXCM clients in ratio of slightly higher than 1:1. Since this is
another way – it has a high win percentage, an RSI range trading strategy, a lower
but still loses more money on losing trades risk/reward ratio gave us better results,
than it gains on winningones. The “raw” because it is a high-probability strategy.
system’s trades are profitable an impressive Fifty six percent of trades in the system were
66% of the time during the test period, but it profitable.
lost an average $165 on losing trades, while
only making an average $98 on winning In comparing these two results, you can see
trades. that not only are the overall results better with
the stops and limits, but positive results are
For our stop and limit settings in this model, more consistent. Drawdowns tend to be
we set the stop to a constant 115 pips, and smaller, and the equity curve a bit smoother.
the limit to 120 pips, giving us a risk/reward

Risk-to-Reward Ratios Matter

350

300

250

200

150

100

50

0
0.5-to-1 1-to-1 1.5-to-1 2-to-2 2.5-to-1

CHART 1.4
Hypothetical overall profit* from a basic RSI strategy using different risk-to-reward ratios
Past performance is not indicative of future results
Source: Appendix 1.4

11
TRAITS OF SUCCESSFUL TRADERS: PART ONE
What is the Number One Mistake Forex Traders Make?

Also, in general, a risk/reward of 1-to-1 or

higher was more profitable than one that was
lower. Of course it must be said, with all GAME PLAN:
backtesting, past performance is not WHAT STRATEGY SHOULD I USE?
indicative of future results.
Trade forex with stops and limits with
Chart 1.4 shows a simulation for setting a a risk/reward ratio of 1:1 or higher.
stop to 110 pips on every trade. The system
Whenever you place a trade, make
had the best overall profit at around the 1-to-1
sure that you use a stop-loss order.
and 1.5-to-1 risk/reward level. In Chart 1.4,
Always make sure that your profit
the left axis shows you the overall return
target is at least as far away from
generated over time by the system. The your entry price as your stop-loss is.
bottom axis shows the risk/reward ratios. You can certainly set your price target
You can see the steep rise right at the 1:1 higher, and probably should aim for
level. At higher risk/rewards levels, the results 2:1 or more when trend trading.
are broadly similar to the 1:1 level. Then you can choose the market
direction correctly only half the time
and still make money in your account.
Again, we note that our model strategy in this
case is a high probability range trading
The actual distance you place your
strategy, so a low risk/reward ratio is likely to
stops and limits will depend on the
work well. With a trending strategy, we would conditions in the market at the time,
expect better results at a higher risk/reward, such as volatility, currency pair, and
as trends can continue in your favor for far where you see support and resistance.
longer than a range-bound price move. You can apply the same risk/reward
ratio to any trade. If you have a stop
level 40 pips away from entry, you
should have a profit target 40 pips or
more away. If you have a stop level
500 pips away, your profit target
should be at least 500 pips away.
...................................

12
TRAITS OF SUCCESSFUL TRADERS: PART ONE
What is the Number One Mistake Forex Traders Make?

DailyFX Resources for Successful Money Management

DailyFX and the DailyFX Trading Instructors have years of experience trading the markets and
helping thousands of new traders learn forex. Here are a few of their many tips that can help you
trade better by improving your money management:

VIDEO RESOURCES
Watch Money Management Basics video
Watch David Rodriguez’s presentation of this research at the FXCM Expo

LIVE ONLINE CLASSES

FXCM clients can take free interactive classes via the DailyFX PLUS Trading Course.
Learn More about the DailyFX PLUS Trading Course

13
 TRAITS OF SUCCESSFUL TRADERS: PART TWO

When is the Best Time of Day

to Trade Forex?
..................................................................................

Summary: We believe that for most forex traders,

the best time of day to trade is Asian hours. During
this time, European currency pairs such as EUR/USD
show the best results.

14
TRAITS OF SUCCESSFUL TRADERS: PART TWO
When is the Best Time of Day to Trade Forex?

Profitability by Hour of Day

60%

55%

50%

45%

GBP/USD EUR/USD USD/JPY AUD/USD USD/CHF

40%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

CHART 2.1
Percentage of trades in the given hour (Eastern Time) that closed with a profit
Source: Appendix 2.1

INTRODUCTION
In looking at the trading records of tens of They should avoid trading during the most
thousands of FXCM clients, as well as talking active times of the trading day. Why?
with even more traders daily via webinars, We’ve seen records for thousands of traders,
email, and Twitter, we have come to believe and we’ve seen what works and what doesn’t.
that most individual forex traders are what are Chart 2.1 shows the percentage of FXCM
called “range traders”. It also becomes client trades in the five most popular pairs
apparent that many of them have trouble that closed with a profit, displayed by the
being successful in forex because they are hour of day.
trading during the wrong time of day.

Most forex traders should trade during the

late US, Asian or early European trading
sessions – essentially 2 PM to 6 AM Eastern
Time (New York), which is 7 PM to 11 AM
UK time.

15
TRAITS OF SUCCESSFUL TRADERS: PART TWO
When is the Best Time of Day to Trade Forex?

EUR/USD - Average Hourly Range in Pips

25

20

15

10

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Late US, Asian, and Early European Session

CHART 2.2
EUR/USD average hourly (Eastern Time) range in pips
Source: Appendix 2.2

By reviewing Chart 2.2, you can see that this significant losses when support or resistance
generally correlates with the low-volatility is broken, which happens most often during
trading hours. Traders tend to see the best the more volatile times of day.
results during the low volatility Asia Session
hours. DOES THE TIME OF DAY THAT I TRADE
MATTER?
This is because most individual forex traders Yes, it matters a lot. We have constructed
use “range trading” strategies – buying a strategy that closely models your “typical
oversold currencies near support and selling trader” (You can find a full description of the
overbought currencies near resistance. These model strategy at the end of this article). We
tend to work well during low volatility times, simulated the strategy’s performance trading
when support and resistance tends to hold. the EUR/USD
Range traders can incur

16
TRAITS OF SUCCESSFUL TRADERS: PART TWO
When is the Best Time of Day to Trade Forex?

24 hours a day during the sampling period. By sticking to range trading only during the
The results, shown in Chart 2.3, are not good. hours of 2pm to 6am, the typical trader would
have been far more successful during the
However, once we factor in the time of day, sampling period than the trader who ignored
things become interesting. Let’s say you the time of day.
made a rule to only trade during low-volatility
times. Chart 2.4 shows the same strategy WHAT ABOUT OTHER CURRENCY PAIRS?
over the same time window, but the system Of course, not all currencies act the same.
does not open any trades during the most For example, the Japanese yen tends to see
volatile time of day, 6 AM to 2 PM Eastern more volatility during Asian hours than the
Time (11 AM to 7 PM London time). The Euro or British Pound, since that is the
difference is dramatic. Japanese business day.

Model Strategy: No Time Filter Model Strategy: Time Filtered

10K 18K

8K 16K

6K 14K

4K 12K

2K 10K

0 0
October, 2001 May, 2011 October, 2001 May, 2011

CHART 2.3 CHART 2.4

Hypothetical returns* w/ no time filter Hypothetical returns* using a time filter
Source: Appendix 2.3 Source: Appendix 2.3

Past performance is not indicative of future results Past performance is not indicative of future results

17
TRAITS OF SUCCESSFUL TRADERS: PART TWO
When is the Best Time of Day to Trade Forex?

We simulated the same strategy, with several We find that the same time filters work very
different possible time settings for the three well for the EUR/USD and USD/CHF, as they
major European pairs: EUR/USD, GBP/USD, are closely correlated. The filters also work
and USD/CHF. fairly well for the GBP/USD. You should range
trade these currency pairs during the 2 PM to
Chart 2.5 shows combined results for the 6AM time window.
strategy on the EUR/USD, GBP/USD, and
USD/CHF during different time frames (in the Unfortunately, as Chart 2.6 shows, our
New York Timezone). As you can see, using optimal time window does not work well for
this strategy overnight during Asian and early Asian currencies.
Euro session has yielded much better results
than our baseline 24 hour RSI.

Time-Filtered RSI Strategy Time-Filtered RSI Strategy

on European Currency on Asian Currency Pairs
Pairs
15K 0

10K -10K

5K -20K

0 -30K

-5K -40K

-10K -50K

-15K -60K

-20K -70K
05’ 06’ 07’ 08’ 09’ 10’ 11’ 05’ 06’ 07’ 08’ 09’ 10’ 11’

RSI Base 16:00 - 06:00 14:00 - 06:00 20:00 - 03:00 17:00 - 03:00

CHART 2.5 CHART 2.6

Hypothetical returns* from an RSI strategy Hypothetical returns* from an RSI strategy
Source: Appendix 2.4 Source: Appendix 2.5
Past performance is not indicative of future results Past performance is not indicative of future results

18
TRAITS OF SUCCESSFUL TRADERS: PART TWO
When is the Best Time of Day to Trade Forex?

Our tests of different time windows on the

USD/JPY, AUD/USD, and NZD/USD have not
produced a single positive equity curve over GAME PLAN:
the past 6 years. This is due to the fact that WHAT STRATEGY SHOULD I USE?
these currencies are more often subject to
large moves during Asia Session than the Trade European currencies during the
European currencies. “Off Hours” using a range trading
strategy.
It is worth noting that the time of day can
have a significant affect on returns in these Our data show that during the
currencies as well. 24 hour trading shows far sampling period, many individual
currency traders have been successful
greater losses than the other time windows.
range trading European currency pairs
during the “off hours” of 2 PM to 6 AM
Eastern Time (7 PM to 11 AM UK
Time).

Many traders have been very

unsuccessful trading these currencies
during the volatile 6 AM to 2 PM time
period. Asia-Pacific currencies can be
difficult to range trade at any time of
day, due to the fact that they tend to
have less distinct periods of high and
low volatility.

...................................

19
TRAITS OF SUCCESSFUL TRADERS: PART TWO
When is the Best Time of Day to Trade Forex?

DailyFX Resources for Successful Range Trading

DailyFX and the DailyFX Trading Instructors have years of experience trading the markets and
helping thousands of new traders learn forex. Here are a few of their many tips that can help you
trade better by improving your skill at range trading.

VIDEOS
Watch Support and Resistance Basics video
Watch RSI Basics video

ARTICLES
Read Trading with Support and Resistance (part 1)
Read Trading with Support and Resistance (part 2)

LIVE ONLINE CLASSES

FXCM clients can take free interactive classes via the DailyFX PLUS Trading Course.
Learn More abouthe DailyFX PLUS Trading Course

20
 TRAITS OF SUCCESSFUL TRADERS: PART THREE

How to Trade the Majors During

Active Hours
..................................................................................

Summary: North American trading hours tend to be

the most difficult to trade in due to the high level of
volatility in the market. Breakout trading strategies
tend to do relatively well in volatile environments, so
if you plan to trade during these times, look to trade
breakouts.

21
TRAITS OF SUCCESSFUL TRADERS: PART THREE
How to Trade the Majors During Active Hours

Profitability by Hour of Day

60%

55%

50%

45%

GBP/USD EUR/USD USD/JPY AUD/USD USD/CHF

40%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

CHART 3.1
Percentage of trades in the given hour (Eastern Time) that closed with a profit
Source: Appendix 2.1

INTRODUCTION
Our past research shows that traders could the 5 most popularly traded pairs during the
be well-served restricting their trading to North American daytime. If we compare these
less-active trading hours, as general trader results with measures of volatility, we can see
profitability tends to improve when markets that this poor performance seems directly
are less volatile. But what if you can’t trade correlated to sharp price swings, as this time
when it’s quiet? For traders who feel the need of day tends to be the most volatile. Chart 3.2
to be in the market during the more volatile shows the average hourly moves in pips for
times, here is some advice about how to do it. the EUR/USD, the most popular currency pair
to trade. You can see that traders’ best results
Chart 3.1 emphasizes that FXCM clients tend coincide with the times of day that have lower
to do poorly in volatility, such as the Asia trading session.

22
TRAITS OF SUCCESSFUL TRADERS: PART THREE
How to Trade the Majors During Active Hours

EUR/USD - Average Hourly Range in Pips

25

20

15

10

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Late US, Asian, and Early European Session

CHART 3.2
EUR/USD average hourly (Eastern Time) range in pips
Source: Appendix 2.2

In part two of this series, When is the Best WHAT STRATEGY SHOULD I USE TO
Time of Day to Trade Forex, we showed that TRADE THE US DAYTIME?
the highly popular Relative Strength Index As mentioned before, we advise traders to
trading strategy produced significantly better trade during the lower-volatility times of day
risk-adjusted returns if we limited it to trade due to the risks that volatility present, and the
exclusively during the least-volatile hours of better results we see in the range trading
the trading day, 2 PM to 6 AM Eastern Time strategies that FXCM clients tend to use.
(New York). Some traders may prefer to trade during the
volatile US daytime, however. So, if you’re
going to do that, make sure that you use the
appropriate strategy at the appropriate time.
Do not try to range trade. Instead, do the
opposite: trade breakouts.

23
TRAITS OF SUCCESSFUL TRADERS: PART THREE
How to Trade the Majors During Active Hours

WHAT IS A BREAKOUT? HOW DO YOU TRADE BREAKOUTS?

A breakout is when a currency that has been Trading breakouts is almost the exact
trapped in a range or channel on the chart opposite of trading ranges. When price moves
breaks through support or resistance, upwards through resistance, look to buy.
escaping the channel. When this happens, When it moves downard through support, look
the movement in prices tends to be very to sell. In the above example, a range trader
powerful, and can create a trading would have tried to sell at the top of the
opportunity. channel and would have likely lost money.
A breakout trader would instead have looked
Here is an example where the EUR/USD to buy.
Daily chart had a channel for two months.
You can see that when this channel broke,
the move was swift and powerful.

Identifying a Price Channel Channel Breakout Example

1.50
1.450

1.45
1.445

1.40 1.440

1.35 1.350

February 2011 August 2011 07/25/11 07/27/11

CHART 3.3 CHART 3.4

EUR/USD daily chart showing price channel EUR/USD five minute chart showing breakout
Source: Appendix 3.2 Source: Appendix 3.3

24
TRAITS OF SUCCESSFUL TRADERS: PART THREE
How to Trade the Majors During Active Hours

SAMPLE STRATEGY: CHANNEL In Chart 3.5 below, you can see the top of the
BREAKOUT channel in light blue and the bottom of the
Past performance is not indicative of future channel in red. The green dotted line shows
results, but the Channel Breakout strategy is profitable trades made by the system, while
quite straightforward and has performed fairly the red dotted line shows losing trades made
well historically. The system draws a channel by the system.
surrounding price action, with the top of the
channel set at the highest high and the
bottom set at the lowest low of the past
twenty bars.

Model Channel Breakout Strategy

Buy when price touches

the top channel

Sell when price

touches the
bottom channel

CHART 3.5
Sample channel breakout strategy illustrating buy and sell signals
Source: Appendix 3.4
Past performance is not indicative of future results

25
TRAITS OF SUCCESSFUL TRADERS: PART THREE
How to Trade the Majors During Active Hours

We sell the currency pair if the price breaks The channel breakout system did reasonably
below the channel bottom. If price quickly well overall, and especially well during times
reverses, we will be taken out of the trade at of strong market volatility in late 2009. Yet it
a loss. Yet if price continues lower, we stand has also had long stretches of
to see profits on the continued moves. underperformance and noteworthy losing
streaks. Since we know that breakout
Thus we can conceptualize this trade system strategies tend to work better during times of
might work especially well during times of higher volatility, how can we instruct our
high volatility, when channels tend to be system to trade only during those times?
broken. Let’s test by looking at how well it has
done on the Euro/US Dollar in the past
several years.

EUR/USD Channel Breakout Strategy (2005 - 2011)

15K

14K

13K

12K

11K

10K

9K
09/07/06 04/27/08 12/23/09

CHART 3.6
Hypothetical returns* from the model channel breakout strategy (2005-2011)
Source: Appendix 3.5

26
TRAITS OF SUCCESSFUL TRADERS: PART THREE
How to Trade the Majors During Active Hours

Channel Breakout Strategy Filtered

10K
Base Channel Breakout
8K 50th Percentile
75th Percentile
6K

4K

2K

0
05’ 06’ 07’ 08’ 09’ 10’ 11’

CHART 3.7
Hypothetical returns* using a model channel breakout strategy and volatilty filter
Source: Appendix 3.6

Past performance is not indicative of future results.

WHEN SHOULD I LOOK TO TRADE When looking at the Channel Breakout

BREAKOUTS? strategy above, a quick optimization shows
Every day, we publish Volatility Percentile that the strategy improves noticeably when
figures on the DailyFX Technical Analysis we apply filters. We simulate two cases
page for reference. The Volatility Percentile is below. In one case, the strategy is only
derived from FX options prices. The higher allowed to trade when our Volatility Percentile
the number, the more volatile options traders is above 50%. In the other, it is only allowed
expect the currency pair to be. We can use to trade when it is above 75%. As you can
these volatility percentages to judge when it is see in the chart below, in both cases we see
best to use particular strategies. When better overall results than the “base case” of
volatility percentages are high, we look to letting the system trade at any time.
trade breakout strategies. When they are low,
we look to avoid them.

27
TRAITS OF SUCCESSFUL TRADERS: PART THREE
How to Trade the Majors During Active Hours

With the 50 percentile filter, the strategy is

allowed to trade about half the time. With the
75 percentile filter, the system can only trade GAME PLAN:
about 25% of the time. Over time, the 50 WHAT STRATEGY SHOULD I USE?
percentile filter has been shown to prevent
many of the losing trades in the system, while When volatility is above 75%, trade
preventing only a few of the winning trades. using a breakout strategy.
This has produced some of the best historical
returns on an overall final net-profit basis but Our data show that over the sampling
has also shown significant losing streaks. period many individual currency
traders have generally been
Keep in mind that past performance is not
unsuccessful trading in times of high
indivative of future results.
volatility. We generally recommend
trading European currencies during
With the 75 percentile filter, prevents even the “Off Hours” using a range trading
more trades – both good ones and bad ones. strategy, as we found that this
While the overall result over the past six approach tends to perform well and
years has not been quite as good as the 50 best matches how most FXCM clients
percentile one, there were few times of trade.
significant losses. Indeed, when we fully take
Traders who feel the need to trade
risk into consideration, we prefer the 75th
during times of high volatility should
percentile filter, as it makes rather fewer
use a different strategy and look to
losing trades and we are glad to forego some trade breakouts rather than ranges.
potential profits in order to lower our risk of Breakout trading tends to show the
potential loss. best risk-adjusted returns if limited to
the most volatile trading days. Use
the DailyFX Volatility Percentage to
gauge what FX options traders expect
for volatility in the near future. When
above 75%, breakouts are
significantly more likely than normal.
...................................

28
TRAITS OF SUCCESSFUL TRADERS: PART THREE
How to Trade the Majors During Active Hours

DailyFX Resources for Successful Breakout trading

DailyFX and the DailyFX Trading Instructors have years of experience trading the markets and
helping thousands of new traders learn forex. Here are a few of their many tips that can help you
trade better by improving your skill at trading breakouts.

VIDEOS
Watch David Rodriguez discuss this topic at the FXCM Expo

ARTICLES
Read How to Trade a Breakout Strategy on the EUR/USD

LIVE ONLINE CLASSES

FXCM clients can take free interactive classes via the DailyFX PLUS Trading Course.
Learn More abouthe DailyFX PLUS Trading Course

29
 TRAITS OF SUCCESSFUL TRADERS: PART FOUR

How Much Capital Do I Need

to Trade Forex?
..................................................................................

Summary: Our research shows that the amount of

capital in your trading account can affect your
profitability. Traders with at least $5,000 of capital
tend to utilize more conservative amounts of
leverage†. Traders should look to use effective
leverage of 10-to1 or less.

30
TRAITS OF SUCCESSFUL TRADERS: PART FOUR
How Much Capital Do I Need to Trade Forex?

Profitability by Account Equity

40% 37.37%
33.12%
30%

20.91%
20%

15%

$0 - $999 $1,000 - $4,999 $5,000 - $9,999

CHART 4.1
Percentage of accounts in the given equity range that were profitable
Source: Appendix 4.1

INTRODUCTION
In looking at the trading records of tens of A LIKELY CULPRIT
thousands of FXCM clients, as well as talking Since many smaller traders are inexperienced
with even more traders daily via live in trading forex, they tend to expose their
webinars, Twitter, and email, it appears that account to significantly higher levels of
traders enter the Forex market with a desire effective leverage. As a result, this increase in
to cap their potential for losses on their risk leverage can magnify losses in their trading
based capital. Therefore, many newer traders account.
choose to start trading forex with a small
capital base.

What we have found out through the analysis

of thousands of trading accounts is that
traders with larger account balances tend to
be profitable on a higher percentage of
trades. We feel this is a result of the
“effective” leverage used in the trading
account.
31
TRAITS OF SUCCESSFUL TRADERS: PART FOUR
How Much Capital Do I Need to Trade Forex?

Profitability & “Effective” Leverage

40% 26:1 30:1
37.37%
33.12% 25:1
30%
20:1
20.91%
20% 15:1
6:1 10:1
15% 5:1
5:1
0
$999 $4,999 $9,999

CHART 4.2
Average “effective” leverage given account equity
Source: Appendix 4.1

Emotionally spent, traders then either give up In Chart 4.2, we have modified 2 elements of
on forex or choose to compound the issue by the chart in figure 1. First, we renamed each
continuing to trade in relatively high amounts column to represent the highest dollar value
of effective leverage. This becomes a vicious that qualified for the given column. For
cycle that damages the enthusiasm which example, the $0-$999 equity range is now
attracted the trader to forex. being represented as the $999 group. The
$1,000 - $4,999 equity range is now being
No matter how good or bad your strategy is, represented as the $4,999 group. And
your decision (or non-decision, as the case likewise, the $5,000 - $9,999 range is now
may be) about effective leverage has direct being represented as the $9,999 group.
and powerful effects on the outcomes of your
trading. Last year, we published some tests
showing the results over time of the same
strategy with different leverage.

32
TRAITS OF SUCCESSFUL TRADERS: PART FOUR
How Much Capital Do I Need to Trade Forex?

The second change made was that we HOW MUCH EFFECTIVE LEVERAGE
calculated the average trade size of each SHOULD I USE?
group and divided it into the maximum We recommend trading with effective
possible account balance for that group. In leverage of 10 to 1 or less. We don’t know
essence, this provided us a conservative and when the market conditions will change
understated effective leverage amount. (A causing our strategy to take on losses.
larger balance reduces the effective leverage Therefore, keep the effective leverage at
so the red line on the chart is the lowest and conservative levels while using a stop loss on
most conservative calculation of the chart.) all trades. Here is a simple calculation to help
For example, the average trade size for the you determine a target trade size based on
$999 group was 26k. If we take the average your account equity.
trade size and divide it by the account equity,
(account equity) X (effective leverage target)
the result is the effective leverage used by = maximum account exposure
that group on average.

As the effective leverage dropped significantly EXAMPLE: 10-TO-1 TARGET

from the $999 group to the $4,999 group (red
line), the resulting proportion of profitable
accounts increased dramatically by 12 basis
points (blue bars). Then, as further capital is
added to the accounts such that they moved Account Equity Max. Exposure
into the $9,999 category, the effective
$5,000 $50,000
leverage continued to incrementally drop
$10,000 $100,000
pushing the profitability ratio even higher
to 37%. $25,000 $250,000

$100,000 $1,000,000

$1,000,000 $10,000,000

FIGURE 4.1

33
TRAITS OF SUCCESSFUL TRADERS: PART FOUR
How Much Capital Do I Need to Trade Forex?

The above illustration shows a trader’s Their effective leverage is at least 26 times
account size and the maximum trade size which is significantly higher than the 10 times
based on 10 to 1 leverage. That means if you leverage discussed earlier. If these traders
have $10,000 in your account, then never want to trade at no more than a 10 to 1
have more than 100,000 of open trades at effective leverage, they would need to make
any one time. at least one of the adjustments noted below.

The precise amount of leverage used is Increase their trading account equity by
decided entirely by each individual trader. You depositing more funds to an amount that
may decide that you are more comfortable reduces their effective leverage to less than
using an even lower effective leverage such 10 to 1. So our average trader, who is
as 5 to 1 or 3 to 1. averaging 26k trade sizes, would need at
least $2,600 in their account to trade 26k on a
Most professional traders enter into trading 10 to 1 effective leverage.
opportunities focused on how much capital
they stand to lose rather than how much Decrease their trade size to a level that
capital they are looking to gain. Nobody reduces their effective leverage to less than
knows the future movement of prices so 10 to 1. Use the figure 3 calculations and
professional traders are confident in their chart above.
trading approach but conservative in their use
of effective leverage. In Chart 4.3, notice how the trade size
remains relatively stable as the account
ADJUSTING EFFECTIVE LEVERAGE TO equity increases from the $999 group to the
SUIT YOUR RISK TOLERANCE $4,999 group. In essence, this indicates that
Our research indicates that accounts with the traders are looking for, on average, at least
smallest capital base (the group labeled $2.60 per pip (if they average 26k
$999) have an average trade size of 26k for
each trade.

34
TRAITS OF SUCCESSFUL TRADERS: PART FOUR
How Much Capital Do I Need to Trade Forex?

“Effective” Leverage & Account Exposure

30:1 54K 60K
26:1
25:1 50K
20:1 40K
30K
15:1 26K 30K
10:1 20K
6:1
5:1
5:1 10K
0 0
$999 $4,999 $9,999

CHART 4.3
Average market exposure and “effective” leverage for the given equity level
Source: Appendix 4.3

for each trade, or $2.60 per pip. Perhaps they Using a conservative amount of leverage will
want a large enough trade size to make their help slow down the rate of capital losses
time invested trading worthwhile. In other when a trader goes through a losing streak.
words, traders may be seeking a price per pip
value and $2.60 is the minimum threshold on Regardless of the reasons, our goal is to use
average. If these traders were to use no more conservative amounts of leverage. If you
than 10 to 1 effective leverage, they would know how much risk capital you have
need at least $2,600 in their account to available, then use the chart and calculations
support $2.60 per pip. in Figure 3 to determine the right trade size
for your account.
Another possibility is that many newer traders
simply don’t understand the power of
leverage and how one large losing trade can
wipe out several winning trades in a row.

35
TRAITS OF SUCCESSFUL TRADERS: PART FOUR
How Much Capital Do I Need to Trade Forex?

If you have a target “per pip” value, then use

the calculations in figure 5 to determine the
minimum amount of account capital needed GAME PLAN:
to support your trade size. Increasing your WHAT STRATEGY SHOULD I USE?
capital base does not mean you will become
more profitable. It means that you can stay in Trade with “effective” leverage of 10:1
a trade longer if it goes against you. On or less.
average, traders that use a combination of
sufficient capital (at least $5,000) and Leverage is a double-edged sword that
that dramatically
can can dramatically amplify
amplify your your
gains
conservative use of effective leverage
gains
and and losses.
losses. If you choose
If you choose to tradeto with
(10 to 1 or less) tend to be more profitable.
tradeleverage,
with with withwe
leverage,
recommend we that you
recommend
do that you
not lever your do not
account lever
more than
Leverage is a double-edged sword and can your
10 account
times more
(10:1). Doingthanso10can
times
greatly
dramatically amplify your profits. It can also (10:1). Doing
decrease yourso can greatly
chance of beingdecrease
just as dramatically amplify your losses. your chance of being profitable.
profitable.

Most professional traders enter into

trading opportunities focused on how
much capital they stand to lose rather
than how much capital they are looking
looking
to gain. toNobody
gain. Nobody
knows theknows the
future
future movement
movement of prices
of prices so
so professional
professional
traders traders are
are confident confident
in their in
trading
their trading
approach butapproach but in their use
conservative
conservative
of in their use of effective
effective leverage.
leverage.

...................................

36
TRAITS OF SUCCESSFUL TRADERS: PART FOUR
How Much Capital Do I Need to Trade Forex?

DailyFX Resources for Successful Money Management

DailyFX and the DailyFX Trading Instructors have years of experience trading the markets and
helping thousands of new traders learn forex. Here are a few of their many tips that can help you
trade better by improving your skill at money management.

VIDEOS
Watch Introduction to Money Management video
Watch David Rodriguez’s Controlling Leverage and Usable Margin video

ARTICLES
Read Arriving at a Risk/Reward Ratio
Read Increase Your Chances of Becoming a Successful Trader

LIVE ONLINE CLASSES

FXCM clients can take free interactive classes via the DailyFX PLUS Trading Course.
Learn More abouthe DailyFX PLUS Trading Course

37
Appendix

1.1 - Chart 1.1

Chart 1.1 shows the percentage of trades in the given currency pair that closed with a profit.
The data is derived from Forex Capital Markets LLC accounts—excluding managed and Eligible
Contract Participant accounts—from 10/01/2009 to 09/30/2010. All data is rounded to the nearest
whole number.

1.2 - Chart 1.2

Chart 1.2 shows the average profit and loss per trade in the given currency pair. Profits and losses
are shown in pips. The data is derived from Forex Capital Markets LLC accounts—excluding
managed and Eligible Contract Participant accounts—from 10/01/2009 to 09/30/2010. All data is
rounded to the nearest whole number.

1.3 - Chart 1.3

Chart 1.3 shows the hypothetical returns from a model RSI strategy trading USD/CHF on a
60-minute.

The blue line is the model strategy’s hypothetical returns when stops and limits were not
used in this backtest.

The red line is the model strategy’s hypothetical returns when stops and limits were used in
this backtest.

The model RSI strategy was designed to mimic a “typical trader” using one of the most common
intraday range trading strategies—following RSI on a 15 minute chart.

Entry Rule: When the 14-period RSI crosses above 30, buy at market on the open of the next bar.
When RSI crosses below 70, sell at market on the open of the next bar.

Exit Rule: Strategy will exit a trade and flip direction when the opposite signal is triggered.

38
When adding in the stops and limits, the strategy can close out a trade before a stop or limit is hit,
if the RSI indicates that a position should be closed or flipped. When a stop or limit order is
triggered, the position is closed and the system waits to open its next position according to the
“Entry Rule.” Backtests were generated using FXCM’s Strategy Trader platform.

1.4 - Chart 1.4

Chart 1.4 uses the same model RSI strategy as described above in appendix 1.3. It shows how the
overall profit changes when different risk-to-reward ratios are used.

The stop distance was held constant at 110 pips of risk for every trade that opened. The limit
distance was adjusted accordingly for each backtest so that the following risk-to-reward ratios
could be achieved: 0.5-to-1; 1-to-1; 1.5-to-1; 2-to-2; 2.5-to-1.

2.1 - Chart 2.1 and Chart 3.1

Chart 2.1 and Chart 3.1 shows the percentage of trades in the given currency pair that closed with
a profit. The data is derived from Forex Capital Markets LLC accounts—excluding managed and
Eligible Contract Participant accounts—from 10/01/2009 to 09/30/2010. All data is rounded to the
nearest whole number.

2.2 - Chart 2.2 and Chart 3.2

Chart 2.2 and Chart 3.2 shows the average hourly range, in pips, for the EUR/USD. All times are
displayed in Eastern Time.

2.3 - Chart 2.3 and Chart 2.4

Chart 2.3 shows the hypothetical returns from a model RSI strategy trading EUR/USD 24 hours a
day during the sampling period. Chart 2.4 shows the hypothetical returns from the same model
strategy. However, in Chart 2.4 no trades were placed from 6AM to 2PM Eastern Time.

The model RSI strategy was designed to mimic a “typical trader” using one of the most common
intraday range trading strategies there is—following RSI on a 15 minute chart.

39
Entry Rule: When the 14-period RSI crosses above 30, buy at market on the open of the next bar.
When RSI crosses below 70, sell at market on the open of the next bar.

Filter: Strategy cannot enter trades between the “end hour" and the next “start hour".

Exit Rule: Strategy will exit a trade and flip direction when the opposite signal is triggered.
This strategy has worked best over the past 10 years using European currency pairs and setting the
start hour to 2 PM and the end hour to 6 AM Eastern Time (New York). Please note, past
performance is not indicative of future results. Backtests were generated using FXCM’s Strategy
Trader platform.

2.4 - Chart 2.5

Chart 2.5 uses the same model RSI strategy as described above in appendix 2.3. However, the
strategy trades the EUR/USD, GBP/USD and USD/CHF. Five backtests were performed using
different time filters: 1) no time filter; 2) 16:00 - 06:00 ET; 3) 14:00 - 06:00 ET; 4) 20:00 - 03:00 ET; 4)
17:00 - 03:00 ET. The same sampling period was used.

2.5 - Chart 2.6

Chart 2.6 uses the same model RSI strategy as described above in appendix 2.3. However, the
strategy trades the USD/JPY, AUD/USD, and NZD/USD. Five backtests were performed using
different time filters: 1) no time filter 2) 16:00 - 06:00 ET 3) 14:00 - 06:00 ET 4) 20:00 - 03:00 ET 4)
17:00 - 03:00 ET. The same sampling period was used.

3.1 - Chart 3.2

Chart 2.6 uses the same model RSI strategy as described above in appendix 2.3. However, the
strategy trades the USD/JPY, AUD/USD, and NZD/USD. Five backtests were performed using
different time filters: 1) no time filter 2) 16:00 - 06:00 ET 3) 14:00 - 06:00 ET 4) 20:00 - 03:00 ET 4)
17:00 - 03:00 ET. The same sampling period was used.

40
3.2 - Chart 3.3
Chart 3.3 is a daily chart of the EUR/USD from February 2011 to August 2011. It is used to illustrate a
price channel.

3.3 - Chart 3.4

Chart 3.4 is a five minute chart of the EUR/USD from 07/25/11 to 07/27/11. It is used to illustrate how
an instrument’s price can breakout significantly if/when its price moves through a price channel
boundary.

3.4 - Chart 3.5

Chart 3.5 is a model channel breakout strategy. For our models, we used one of the most common
and simple breakout trading strategies there is, creating channels on a 60 minute chart.

Entry Rule: When price crosses above the highest price of the last 20 bars, buy at market on the
open of the next bar. When price crosses below the lowest price of the last 20 bars, sell at market on
the open of the next bar.

Filter: Strategy can only enter new trades when the Volatility Percentage is above the specified level
(such as the 50% or 75% examples used in Part Three of this series).

Exit Rule: Strategy will exit a trade and flip direction when the opposite signal is triggered.

The EUR/USD this strategy has shown the best risk-adjusted returns in the EUR/USD over the past 6
years when it was restricted to trade only when the Volatility Percentage was above 75%. Past
performance is not indicative of future results.

3.5 - Chart 3.6

Chart 3.6 shows the hypothetical returns of the model channel breakout strategy described in
appendix 3.4. The EUR/USD pair was traded from 2005 - 2011 using a 60 minute chart. No volatility
filters were applied to this backtest.

41
3.6 - Chart 3.7
Chart 3.7 shows the hypothetical returns of the model channel breakout strategy described in
appendix 3.4. The EUR/USD pair was traded from 2005 - 2011 using a 60 minute chart. Three
separate backtests were performed using the following volatility filters: 1) No filter; 2) trades are only
entered when the Volatility Percentile is greater than 50%; 3) trades are only entered when the
Volatility Percentile is greater than 75%.

4.1 - Chart 4.1

Chart 4.1 shows the percentage of accounts in the given equity range that were profitable at the end
of the quarter. The data is derived from Forex Capital Markets LLC accounts—excluding managed
and Eligible Contract Participant accounts—from 10/01/2009 to 09/30/2010. All data is rounded to the
nearest whole number.

4.2 - Chart 4.2

Chart 4.2 shows the average “effective” leverage used assuming the given equity figure. Effective
leverage is calculated by taking the average notional account exposure divided by the given equity
figure (i.e. $999, $4,999 or $9,999). The data is derived from Forex Capital Markets LLC
accounts—excluding managed and Eligible Contract Participant accounts—from 10/01/2009 to
09/30/2010. All data is rounded to the nearest whole number.

4.3 - Chart 4.3

Chart 4.3 shows the average market exposure and “effective” leverage for the given equity level.
The data is derived from Forex Capital Markets LLC accounts—excluding managed and Eligible
Contract Participant accounts—from 10/01/2009 to 09/30/2010.
All data is rounded to the nearest whole number.

42
Disclaimers
High Risk Investment Warning
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.
The high degree of leverage can work against you as well as for you. Before deciding to trade foreign
exchange you should carefully consider your investment objectives, level of experience, and risk appetite.
The possibility exists that you could sustain a loss of some or all of your initial investment and therefore
you should not invest money that you cannot afford to lose. You should be aware of all the risks associ-
ated with foreign exchange trading, and seek advice from an independent financial advisor if you have
any doubts.

DailyFX Release of Liability

DailyFX does not warrant the accuracy or completeness of the information, text, graphics, links or other
items contained within these materials. DailyFX shall not be liable for any special, indirect, incidental, or
consequential damages, including without limitation losses, lost revenues, or lost profits that may result
from these materials. Opinions and estimates constitute our judgment and are subject to change without
notice. The information in these articles does not constitute investment advice. Past performance is not
indicative of future results.

*Hypothetical Performance and Backtesting Risks

Hypothetical performance results have many inherent limitations. No representation is being made that
any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently
sharp differences between hypothetical performance results and the actual results subsequently achieved
by any particularly trading program.
One of the limitations of hypothetical performance results is that they are generally prepared with the
benefit of hindsight. In addition, hypothetical trading does not involve financial risk. Variables such as
the ability to adhere to a particular trading program in spite of trading losses as well as maintaining
adequate liquidity are material points which can adversely affect actual real trading results.
Past Performance is not indicative of future results.

†Leverage Risk Warning

Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as
dramatically amplify your losses. Trading foreign exchange with any level of leverage may not be suitable
for all investors.

43