Forex Probabilities
How important are Forex Probabilities when trading?
When a beginning trader thinks about winning and losing in the Forex market they will usually consider it some kind of luck. It usually is at the start, but a seasoned trader should be focusing more on Forex Probabilities. As you more clearly understand the market, you will start to figure out that the “luck” mindset is not healthy to your trading success.
I want to talk a little about the different aspects of trading on probabilities. There are some requirements to be able to trade on probabilities. First of all, you have to know what you are doing, at least at some level (which excludes the beginning trader). Second, you have to have tested your techniques and strategies so you know what you can expect in different market conditions. Third, you need to be able to control the emotions that throw the positive effects of Forex probabilities out the window. If you can master these three things then you can start to “Trade on Probabilities”.
You will want to know the rough probabilities for a couple of key elements: Your Risk/Reward Ratio and your Win/Loss Ratio. Understanding what your Win/Loss ratio is on any particular strategy you are trading helps you trade more successfully over the long run. When you incorporate that understanding with a positive Risk/Reward ratio it will only help boost your profits. Let me explain with an example:
If I had a trading strategy that has returned a 70% winning record over the past 3 months, then I can safely expect that 7 in 10 of the trades I place will be winners. That is, as long as I have clearly defined entry and exit rules and I follow those rules. This might sound good to you, but you need to know the Risk/Reward ratio before you can determine if it is a solid system. If the losses are twice as big as the gains, then you will end up poorer at the end of the month for trading it. So a high probability strategy incorporates both W/L & R/R.
Sometimes your emotions and your mindset can get in the way of a profitable system. Let’s say you find a strategy that is only 30% successful, meaning that you have lost 7 of every 10 trades using it. Most people would throw it out the window looking for a better system, but without knowing the R/R how can you know if it is profitable or not? What if the wins were 3 times the size of the average loser. Here is some Math:
10 Trades, 30% Wins
3 Wins at 90 pips each = +270 pips
7 Losses at 30 pips each = -210 pips
Total Net gain of 60 pips
This is just an example, but you can see that if you react emotionally to losing 70% of your trades by throwing the system out, you are rejecting a lot of potentially profitable trades. The easiest thing to do is only trade strategies that have both a positive Win/Loss record and a better than 50/50 Risk/Reward ratio. The hardest thing to do is to find them.
The best thing you can do to eliminate the emotional problems related to probabilities is to view your trading success and failure based on a larger time frame. Looking at your wins each day or every trade will make it much harder to see the bigger picture. If you view your results per week or month then you can see more clearly what’s working and what isn’t. It is also imperative to keep a detailed trade journal about all your trades, so you will be able to look at each strategy separately to determine its effectiveness. But journaling is a whole other topic.
I hope this helps you begin to think about Forex Probabilities in a new light.
Good luck in your trading.
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