Forex Monthly Analysis Explained
Analyzing one’s trading data is not only helpful for keeping track of one’s progress, but also for improving the trading performance in the long term. By the end of each month, it might be a good idea to keep track of the following items:
- Total net gains or losses per month
- The overall percentage of winning trades
- Average pip value
- Currency pairs with the highest and lowest percentage of winning trades
- Most and least successful trading strategies
- The average timeframe for trades
- Largest gain and loss for one trade
It goes without saying that traders can also keep track of dozens of other indicators. However, the ones mentioned above can be very important for the long term improvement of an individual's trading skills.
Benefits of Monthly Forex Trading Analysis
Researching dozens of currency pairs, making calculations, and executing trades on a daily basis can already be quite a tiring task for some traders. Consequently, some people might wonder: What is the point of adding one additional regular task to one’s trading activities? Are there any significant benefits for conducting monthly reviews?
Here, it's worth noting that doing regular monthly analysis does have certain advantages. As mentioned above, the first item on our list is the average profit or loss per month.
Now, there are some traders, who do Forex trading just as a hobby or for entertainment purposes. However, most likely the majority of market participants have a goal to earn some decent payouts from trading. Consequently, keeping the track of average monthly earnings, helps them to measure the degree of their progress towards that goal.
This can be especially helpful for those beginners who are still using Forex demo accounts and want to decide when they will be ready to move on to real trading. Here they can take their monthly results and determine whether they have made any net gains during the period.
Obviously, if the trader is still operating at a loss it might be a good idea to stick to a demo account and keep practicing. However, once the market participant reaches the point where he or she makes net gains on a monthly basis, then it might be the time to consider moving on to the real trading accounts.
Once a trader has two or more months’ worth of data to work with, then it becomes possible to analyze the latest trends in one’s trading performance. Here the market participants can ask the following questions: are the monthly amount of losses coming down? Is the average monthly payout increasing over time?
Keeping track of the average monthly gains or losses can also help traders to set realistic targets in their trading. For example, if a market participant still posts a monthly net loss of $300, then setting a goal of earning $5,000 payout during next month might not be a very realistic target.
Instead, it might be a much better option to improve one’s trading goals incrementally. Returning to our example, after suffering $300 loss per month, traders can set an initial goal of eliminating the monthly net losses and then after 3 months, reaching $500 payout per month.
It goes without saying that setting these goals does not necessarily mean that traders will be able to achieve them. However, even if the trader posts a $50 loss during the next month, he or she still made significant progress towards those goals. After all, as we can see, the trader has improved over the previous month’s result, by reducing the total amount of net losses by $250.
In addition to that, traders might identify the largest amount of gains and losses per month for a single trade. This can be also helpful for both tracking one’s trading performance, as well as for future planning purposes.
So as we can see here, the total amount of net gains or losses per month can be used as a measuring rod for tracking one’s trading performance.
Ratio of Winning Trades per Month
Another important indicator in one’s monthly trading analysis is the ratio of winning trades. This can be an informative indicator in many ways. Firstly, it shows the rate of accuracy of the trader’s predictions, which can be very informative when making future trading decisions.
Consequently, if this ratio is low, then traders might have to consider modifying trading strategies or using other Forex indicators in the decision-making process. On the other hand, if the ratio of winning trades is above 50%, but the trader still loses the money, then this might be a major sign that the individual has to work for setting a proper risk/reward ratio.
Obviously, even the most successful professional traders can not achieve 100% winning trades. However, if traders see that their ratios of winning trades improve over the months, then it might be a notable sign that they are making significant progress.
In addition to that, traders can also identify the currency pairs with the highest percentage of winning trades. In many cases, this shows that the trader has already developed a certain degree of proficiency by trading these securities.
Consequently, in the future, the market participant might consider opening positions with those pairs more frequently, which might help him or her to improve their overall trading results.
At the same time, the market participants can also identify those currency pairs with which they had the poorest results. Here traders might decide to reduce their exposure for these types of securities and perhaps also change the types of Forex techniques they used with these pairs.
Average Pip Value and Timeframe for Trades
When conducting the Forex monthly monitoring, there are some other potentially useful items traders can keep in mind. For example, the average pip value measures the average amount of gains and losses for one pip change in the exchange rate.
Now, if a trader makes dozens of trades per month, measuring this indicator can be a time-consuming process. However, traders can take just a couple of samples from their trading journal and calculate the average pip value.
This can be very helpful for setting proper stop-loss orders as well as targets for payouts for each trade. For example, if a trader knows that the average pip value for the pair is $15, then he or she can conclude that for 20 pip gain, the payout will be close to $300.
The average timeframe for trades can be yet another important thing to analyze during the monthly reviews. This actually helps market participants to identify their trading style. For example, scalpers open their trades with a 1 to 15-minute time frame in mind. Day traders tend to close all of their trades by the end of each trading day. The swing traders typically have a timeframe ranging from several days to weeks. Finally, we have the long term traders, who might keep trades open for several weeks or months.
With each trading style, many experienced professional Forex traders tend to use different trading strategies. Consequently, if a trader manages to identify the average timeframe for his or her trades, then it can certainly be helpful for determining one’s trading style. Once traders manage to do this, they can make use of these strategies and indicators, which are most suitable for this type of trading.
Identifying Best and Worst Performing Trading Strategies
Identifying the best and worst trading strategies can be one of the most important parts of the monthly review process. This can help traders to identify their past mistakes and also techniques which work well during this period.
So how can the market participants conduct this sort of analysis? Well, in order to make it easier to understand, let us take a look at this 1-hour EUR/JPY Heiken Ashi chart:
Let us suppose that during the 28th of July, shown at the beginning of this diagram, the trader, seeing several red Heiken Ashi candlesticks in a row, decided that the pair was in a downward trend and opened a short EUR/JPY position. As we can see from this chart, this trade was not that successful, at least in the short term.
So what sort of conclusions traders can make from this example? Well, after reaching the bottom at the end of July 28th, the price has struggled to go any lower. Instead, we have several small green candles, followed by 3 large green candles, taking the exchange rate higher.
This seems like a clear case of a reversal, something traders should have noticed. At this stage, the market participants could have closed the trade and reduced the total amount of losses significantly.
On the fundamental level, traders might note that there might be very limited upside potential for the Japanese yen. The fact of the matter is that the Bank of Japan keeps its own key interest rate at -0.1%. The Japanese policymakers have already conducted several series of quantitative easing programs and they have expressed no intention of changing the policy in the foreseeable future.
Consequently, traders here might conclude that strictly relying on the latest large Heiken Ashi candlesticks to identify trends might not be the best trading strategy. Instead, market participants might be better off looking for signs of reversals and also keeping an eye out for the fundamental indicators as well.