What is the 90% rule in forex?

Who wants to read an article about why traders fail? But the 90-90-90 rule or the rule of 90 deals with this hard statement that allegedly 90% of beginner forex traders lose 90% of their funds within the first 90 days of trading.

Obviously, this isn’t a hard fact or an absolute truth. It is more of an observation made over the years. It comes from seeing new traders jump into trading and lose a large part of their funds.

Whether it is called the rule of 90 or the rule of 80, the idea is the same. New traders tend to lose a lot of money at the beginning. This pattern has been observed time and again in the trading world. We may have experienced it ourselves and tried to brush it off as a mere isolated incident. However, the hard reality is that many traders lose funds early on. This is a common mistake made by a large number of beginners. It often happens just as they are getting started in trading.

The rule simply highlights an important truth about trading.
It is not a casual hobby you engage in now and then without knowledge or discipline. Trading is an art and a profession that demands dedication and hard work. The rule can also be taken as a warning to the young and inexperienced.

Trading involves risk, and unless you have the patience, education and skill, you should be very careful.

For those who want to explore and trade forex CFDs, facing reality is essential. They must understand that trading is hard work, not a quick path to riches. This mindset will help them stay on the right side of the statistics.

Risk-Reward Ratio in forex

As the name suggests, the risk-reward ratio compares potential loss to potential gain. It helps traders manage risk by setting clear expectations for each trade. Traders use it to decide what they are willing to lose or win before entering a position.

In other words, the risk-reward ratio helps traders answer the question: “Is this trade worth taking? If the answer is no, then the trader should avoid making that.

To calculate the risk-reward ratio, traders need to divide the potential profit by the potential loss of a trade.

Risk-Reward Ratio = Potential Profit / Potential Loss

Example: A trader is considering a trade with the possibility of making a profit of $900 and a loss of $300.

Risk-Reward Ratio = $900 / $300 = 3:1

In this example, the risk-reward ratio is 3:1, which means the trader expects to make three times the amount they are risking.

Why is Risk-Reward Ratio important in trading?

For one, the risk-reward ratio helps traders make better decisions in about whether they need to open a trade or not.

A good risk-reward ratio shows a forex trader whether the potential profit outweighs the risk or not. It allows the trader to seriously consider possible outcomes. This helps decide if the trade is something they can afford to take on.

Then, there is risk management entering the equation. If you want to stay in for the long term, risk management comes into play, as knowing the risk-reward ratio before entering a trade, traders can understand the risks involved and whether they are taking on too much risk compared to the likely rewards.

Another important benefit of considering the risk-reward ratio is avoiding risky decisions. It helps prevent thoughtless and badly calculated trades. This leads to better overall discipline and outcomes.

Whether you just feel like it, or have been overtaken by greed, entering a trade on a whim can cost you dearly. By focusing on the outcome and considering potential risks, you can cultivate a healthier mindset and stay in trading for the longer term.  

90% rule and trading

The 90% rule is not something that should be taken as a deterrent or to scare market participants off, but a cautionary tale or reminder that trading is not without risks.

It kindly warns beginner forex traders to enter the market with caution. They should be prepared and knowledgeable before trading. With time, experience, and the right mindset, they can achieve consistent results and be rewarded.

It is not an easy path, and the risks are there, even for those who sometimes come prepared. However, knowing this and anticipating it, means you are responsible and come better prepared than unsuspecting traders.

Professional forex traders tend to focus on certain areas that beginner traders should also consider carefully before starting to trade.  One of the key aspects of trading that any trader first encounters is the complexity of terms or the lack of understanding of how things simply work.

So, educating oneself and preparing by first grasping the basics and slowly progressing to learning more and more is very important. By learning, you will also build confidence and become more certain about what moves to make and which ones to avoid!

This will allow you to plan your trades and develop a trading plan, following each step and ticking off any necessary actions you need to take before, during and after placing a trade. Part of trading is risk management and placing stop-loss and limit orders to help you manage risk effectively.

Finally, the right psychology is part and parcel of trading. Being able to rationalise things, control impulsive decisions and avoid overtrading, or trade when the time is right, are all very important.

Fear and Greed in forex trading

Emotion sometimes can save you, but most of the times, it can cost you. Here’s why. Traders who fear all the time, may close trades too early and miss on opportunities.

On the other hand, feeling greedy and making too many trades or using too much leverage can cost you your forex account. While the markets move very quickly and you may feel compelled to enter and exit trades with speedy precision, this is not always the case and patience can prove to be golden.

Entering the right trades and not just several, bad ones, can help you prioritise quality over quantity.

Creating the right forex strategy

Traders who have a plan and have a good forex trading strategy know what they are doing. One of the most common mistakes is not being confident and picking random forex pairs or trading various assets without doing your research and planning your trades.

Professional traders prepare before-hand and have a solid plan. This involves analysing prices using technical analysis and understanding the impact of news releases and market sentiment on the pair they will be trading.

This goes for any other asset. If you know what moves that asset and what may influence it at the time you will be trading, alongside historical data that may give you hints of what lies ahead is a different story than just randomly trading because you just decided two seconds earlier.

By having a good grasp of news releases and macroeconomic data released on the moment you are trading as well as setting clear entry and exit points ahead of entering and exiting your trades, will help you keep clear of mistakes.

Of course, what your ideal risk-reward ratios will be is another important factor. Factoring all these parameters in and managing your trades, while making the necessary adjustments, will keep you on the right track.

Being on the right side of the statistic

At first, many traders experience difficulties and may fail. But this is not the end. Even the best traders experience losses and recover, keeping a right mindset, and moving past the obstacles while learning from their mistakes. If you do face challenges and lose money, being calm and patient, and taking each mistake as a lesson, will help you get back on track.  

Summary

So, to summarise, the 90% rule in forex of CFD trading warns us that 90% of beginner traders could lose 90% of their funds within the first 90 days of trading. This, as we mentioned, should not deter traders from entering the market if they are resolved and certain that trading is for them. This should be taken as a cautionary tale, which should encourage traders to improve their skills, practice effective risk management and create a solid strategy that will help them stay focused.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.