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Why Forex Trading is About Probabilities?
Written by: PaxForex analytics dept - Thursday, 01 February 2018 0 comments
Probabilities explain the chance of something happening. Probabilities in trading are often discussed, but humans have an abysmal capacity to understand and calculate probabilities. Forex is all about risk analysis and probability. There is no single method or style that will generate profits all the time. The key to success is positioning ourselves in such a way that the losses are harmless, while the profits are multiplied. Such a positioning is only possible by managing our risk allocations in accordance with an understanding of probability and risk management.
When traders say that they trade the probabilities or that you need to do that, they usually mean that as long as you have a ‘winning’ system, you will make money even if you have a few losing trades over the short term. In essence, that is a good approach and the right mindset to be in; just focus on making the best trades and, over the long term, you will come out ahead. For long-term success, you have to create a structured trading environment for yourself that allows you to have consistent results. This does not mean that you will automatically have profitable trading results, but you will be able to make targeted adjustments and steady improvements over time.
If there is anything that is sure when trading the financial markets, it is that nothing is sure! Traders must force themselves to analyze their performance over a long period of time, like a month or quarter or year. This is valid for all types of traders, whether you are trading the forex, CFD, commodities, stock
indices, etc. Knowing the exact probability of one setup will therefore never be exactly known. But it is not something we traders should demand. Rather focus on short-term gains, it is recommended to analyze the long-term performance of your trading system or discretionary technical analysis.
In reality, experienced traders usually speak in probabilities and typically have some form of analysis to back up their opinion. No one can say that a particular currency pair will move to an exact point with absolute certainty. In fact, I feel it is naive to think that anyone can predict the direction of a currency pair with absolute certainty over a given period of time. Sometimes you could be correct if you predict that a pair will move to X level with absolute certainty. However, there will be other times when the market doesn't go your way. That is why we must deal with probabilities.
Understanding probability will really help you get a grip on reviewing prospective trading strategies and systems. Professional traders are not worried about the next trade winning or losing. What they care about is making money long term and over time. They want to maximize their profits by playing the mathematics, by thinking in probabilities. Although beginning traders hang their entire psychology, confidence and performance on the next trade, you have to look at the next one as just one free throw in the thousands you will make over time.