Forex trading for beginners faq
Forex trading is a demanding activity that is nothing like the promoters of trading systems portray it to be.
Because an estimated 95 – 98% of people who trade forex, trade at a loss, there is a continuous demand for information. But the demand is for information that will allow forex trading to be easy, not knowledge that will enable the trader to become profitable. Information makes it possible to know, but does not ensure anything will be done.
Frequently asked forex questions
There are certain questions that repeatedly pop up on the Internet when people consider forex trading, so I thought I would write a blog post dealing with some of them.
It will give prospective forex traders a place where they can find most of the answers they have.
What is forex trading?
Forex trading is the buying and selling of currencies.
But, before we get into the technicalities, there is one concept that the prospective forex trader should understand very well, otherwise fx trading will become clouded, frustrating and unsuccessful.
That concept is called “probability”.
Probability in forex trading
If you don’t understand and accept probability and how it finds application in trading, you won’t be able to accept losses and you will allow wins to create euphoria that will lead to losses.
The reason for that is that you will expect every trade to be a success, while probability dictates that not all trades can be successful.
Probability is the likelihood that something will happen.
How likely is it that something that suits me or doesn’t suit me, will happen? This likelihood or probability is expressed as a number between 0 and 1, with 0 indicating no probability that it will happen, and 1 indicating a 100% probability that it will.
In forex trading, we are more concerned with mathematical probability which is a measure of quantifying the likelihood that an event will occur.
Probability is the likelihood that an event will occur, measured by the ratio between favourable cases and the whole number of possible cases. Probability is important because it helps us understand risk.
It differs from when we say “what are the chances that the ball will fall on black?” when we talk about something like spinning a roulette wheel at the casino.
When the amateur gambler asks that question, he does not consider the probability because he never calculated it. His chance to win is a wish.
What the casino knows and accepts in the game of roulette, is that the more the wheel spins, the better the chance that it will win. It also knows the probability will settle between 2.6% and 48.6% in favour of the gambler. That is between 51.4% and 97.4% in favour of the casino.
Here are the probability and payouts for roulette bets.
Probability does not necessarily play out from the first spin or the first trade. But it will play out the more trades are done or wheels are spun. For more insight, read about the Monte Carlo Fallacy also called the gambler’s fallacy or the fallacy of the maturity of chances.
But back to probability.
The trader should strive for a situation or state of mind where the belief in probability is embedded in the belief system of the trader. You must believe without any doubt (like a religion) that probability will eventually act in your favour. If you have any doubt, you will deviate from your trading plan and lose, like most gamblers, rather than win like the casino.
That is why much effort should go into the formulation of a trading strategy and the religious following of a trading plan.
Probability in fx trading is usually based on back testing results or, an archive of executed trades, which gives us a calculated percentage of historic success. We then use this percentage as an indication of what could probably happen in future if we trade the same strategy.
We have an archive of 500 trades already completed which shows that 60% of the trades done with the same trading strategy, was successful.
If we then place a trade based on the same strategy, we have a higher probability that we will be successful, as opposed to unsuccessful. And the more trades we do with the same strategy, the nearer to 60% we can expect our success rate to be.
Important: it does not mean that every 6 out of 10 trades will be profitable. It only means that the more trades we do on the same strategy, the higher the probability will be that we will experience a 60% success rate.
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