Forex: Trusting Probabilities and Mastering Psychology


Introduction

Traders, and especially new traders, seem to not grasp the fact that trading currencies is a
game of numbers and where mastering the psychological states are essential to good trading.
Even seasoned traders with an excellent track record seem to forget the law of numbers and
give no thought to the psychological aspects of trading.
Traders who understand the law of large numbers, make it work for them to benefit their
trading strategies and ultimately their profitability.

The Law of Large Numbers

The law of large numbers states that if the probability of something to happen is X%, the result
will approach closer and closer to that probability the more attempts are made.

Take a small test:

A coin will be flipped 100 times. With each tale, you will win R0.50 and with each head you
forfeit R0.25. (Flipping a coin has a 50% of landing on tales)
Would you participate in this adventure?
If not, then you are no trader / entrepreneur and can only operate in the safety and comfort of
a steady job – you are overly risk averse. The trader with an appetite for risk on the other hand
has an expectant return of: Profit = 100*(0.5*50 – 0.5*25) = 100 * 12.5 = R1250

In the given example above, the AVERAGE profit is R12.50 per flip. But that does not mean that
R12.50 will be made with each flip. The trader could lose on 10 flips in a row, which might
shaken his / her confidence, but this losing streak will NOT change the expected profit of the
game in the long run.

The lesson from this small test is that with each coin flip, EDGE will emerge to produce a net
winner. The trader needs to internalize and accept uncertainty: the result of one trade is not
guaranteed, not even for the best trader in the world. The trader needs to preset conditions to
exit losing trades to be able to trade again and again. This also means that not every trade will
stretch to 1 000 pips and the trader will need some way to estimate where to exit from a trade.
To take probability even further, a compromise between Stop Loss and Take Profit levels are
required as distance from the starting point. A target of 500 pips will not be obtained regularly
and there should be “breathing space” for price movement. Price movement will ultimately hit
your Stop Loss, and if to wide large losses will be suffered.

To have more winners than losers in trading requires everything….. chart analysis,
understanding market momentum and mood, macro analysis, risk and money management.

THE item that that makes all of this possible: emotional control and clarity of mind. The trader
must find a system or strategy and stick to it at all times.

Trading Psychology

Looking at a trading chart the trader has to realize that the chart has no feelings and neither
does the chart care about the trader. The currency market is driven by a mixture of
fundamental forces and the aggregate “belief” of the market participants. The market
participants are humans and computer programs developed by humans. The interpretation of
the market may be polluted by wishful thinking, reality check problems and a variety of other
human emotions.

In trading, the majority of participants are doing the wrong things or following incorrect
actions. That is why there are so many traders in the market losing money. Some of these items
include the setting of to tight stops or no stops at all, using to high leverage, chasing the
market, not able to “see” clear trade setups, using items such as “head and shoulders” as
magical formulae and trading with technical indicators as if the indicators will accurately predict
the future. It is not wrong to use these items, but only in a responsible manner. These items do
not provide the trader with an edge – nearly everybody else utilize them. What is required is a
deeper understanding of the market and to not fall victim to the psychological traps of denial,
avoidance, cognitive capture / information bias, fear, greed and other mental toxins providing a
distorted reality. The trader must be able to look at the chart without wanting to see a buy or
sell opportunity. Just notice “WHAT IS”. Ask if recent candlestick patterns are convincing? Is this
part of the bigger picture or is something seen which looks bigger than it really is? Look at the
15 minute chart and be convinced that the price can’t go higher while reality is a 5 year low.

What is required from the trader is to understand and trust large number probabilities, keep
losses small in relation to profits, avoid setting stop losses to tight, find a system with a small
edge that would suit a particular trading personality, aim for an 80% win rate and a 20% loss
rate, look at the market without emotions, ego, psychology and manage stress. This way the
trader can enjoy process without ever stop learning. No trader can stop learning, reading,
working on self, strategies and understanding the market.

Conclusion

The aforementioned discussion is all good, neat and well, but also need to be put in practice
and practically applied.

One of the best suggestions to approach the market without fear, misgivings or greed is to have
a well-documented trading plan. A trading plan that sets out the traders’ goals which starts
from the ideal situation to be achieved and cascaded down to practical small units to be
achieved. In addition to the personal goals to be achieved, the actual strategy on the currency
pairs to be traded must be included. This strategy will spell out which currency pairs will be
followed, the type of analysis (fundamental versus technical), which indicators will be used, the
time scale, on which circumstances will entry and exit points be based, the leverage, risk and money management. These rules need to be followed very meticulously and record must be
kept in a disciplined manner.

Utilizing a trading plan should be the only routine that need to be followed during the trading.
It should be followed religiously and the results recorded. The trading plan need to be analyzed
and the trader must learn from mistakes. Mistakes must be used to tweak the trading plan to
better the plan. The habit to follow the trading should be reinforced with a positive mindset
and on a conscience the trader must address any and all psychological issues.

With the trading is it possible for the trader to act without emotions and see what the factual
situation on the chart is. By repeating the trading plan over and over (big number probability)
the trader will become profitable in the long run. By repeating the trading over and over the
trader will overcome psychological attachments fear, greed, anxiety elation and any other
human instinct or emotion which could have a negative impact on profitability.

What differentiate C2Wealth Training from the rest?

Introduction

In the Forex industry there are many honest and many not so particularly honest persons

working. The same notion may be applied to the training provided in the industry.

Apart from the honesty and integrity factor, there is also the notion that every service provider

considers his or her service to be different from the pack. And again, the same may be said of

the training service providers in the Forex industry.

Being different from the rest of the pack does not implicate dishonesty. Each service provider

places different levels of emphasis on different items. This does not mean that a service

provider is wrong – the approach is different from the rest of the pack.

It is of critical importance to be able to define what is different in the service that is

being delivered. One cannot just claim to be different and therefore call the service to be of a

better quality and standard. The difference must define and presented to be able to offer the

potential a reasonable chance to make an informed decision.

C2Wealth is a training service provider and prides itself to be different from the rest of the

industry. We have been able to define our difference and is proud to present the reasons for

being different in this article.

The defined difference in presenting training to potential investors stand on two legs – firstly,

we recognize and accepts the fact that there is a difference between education on the one

hand and training on the other hand. Secondly, we recognize the fact that newcomers to the

industry need to find a business from which they potentially can make a profit and a sustainable

income from they may live.

Let us look at these two aspects separately:

Education versus Training

At C2Wealth we believe that there is a difference between education and training. This

difference is built into our programs, which have been developed with this difference in mind.

But what is difference between education and training?

C2Wealth see education as a process of systematic learning that develops a sense of judgement

and reasoning. Training implies the act of imparting a special or behaviour or skill to be utilized

on an operational level.

In this difference we recognize that education has a wider perspective and is comparatively

longer than training. Training on the other hand is the further enhancement of skills

development which improves performance and productivity in the current environment.

 

We therefore have a strong believe that class-room based interventions are more effective and

productive than technology based and self-study actions. The contact and exchange between

the learner and tutor cannot be fully replicated in a technology-based environment. We also

believe that that self-study is most of the time done in an unstructured manner, is time

consuming and with no feedback from a teacher is less effective. Over time, self-study will be

less cost effective than classroom-based interventions.

It is true that learners do not learn at the same speed in a classroom environment. A seasoned

tutor can, however, with the frame of reference of previous experiences make a big difference

and ensure that all learners receive equal interventions.

At C2Wealth we guard against being overly theoretical. Theory is acknowledged, but the

emphasis is on practical education. Learners need to open a demo account beforehand and

practice what is being taught on the demo accounts. Functionality is not the only aspect that

receives attention – we teach the wider picture and show what impact actions have on each

other. For instance, we teach learners the relationship between lot size, margin and equity and

how a change in the one will affect the other.

One the more serious problems we have identified in the Forex training industry is the fact that

there is tendency amongst certain training service providers to provide limited functional

training and mainly focus on teaching a specific strategy. In this lies a huge problem. In the

Forex industry there is no such thing as “one size fits all”. One strategy cannot deliver positive

results for all. Every trader must find his or her own niche and comfort zone. Traders does not

react the same to the various technical indicators. Trader personalities differ and trading styles

differ. Certain strategies require the trader to be on the trading platform constantly with no

room for free time. C2 Wealth aim to avoid this environment and teach learners to become

skilled in all trading functionalities and independently arrive at their own trading strategy.

There are various training programs available after completing the initial foundation training

course. These training interventions are aimed the further enhancement of the skills acquired

during the foundation education phase. The focus is on practical and specialized skills and can

thus, be training and not education.

We are satisfied that after completing our initial 3 day Forex Foundation course, the new trader

will be able to independently make a judgement call to enter into a transaction after careful

analysis of the market to identify entry and exit points and practice sound risk and money

management.

Forex Business Approach

The new trader must realize and understand from the outset that Forex trading is not a “get-

rich-quickly” scheme. Unfortunately, many new traders fall for the trap of cheap propaganda

on the web or by other media that Forex trading holds the magical key to untold riches in an

easy manner. Nothing can be further from the truth. Treating Forex trading like a trip to the casino will end in the same manner – all money will be lost. Traders should be calm and

calculating with a goal of making profit. Not hoping for that one “lucky draw” that will bring the

riches.

At C2Wealth we educate learners the entrepreneurial aspect of trading. Trading, like any other

type of business has associated costs. The trader must aim to bring in more revenue with

winning trades than funds going out with costs. When costs get out of control, money will be

lost and the Forex business will go under.

What are then associated costs of trading? Here is an illustrative list:

  • Losing trades
  • Broker spreads and commissions
  • Trade roll-over and swaps
  • Computer hardware
  • Internet costs
  • Other office equipment

Of the six items listed above, the first one, namely losing trades, has the single biggest influence

and has the possibility to totally wipe out the account.

Losing trades is a fact of life in the Forex trading business and traders must learn to accept

losses and learn from it. The approach at C2Wealth is to educate traders to combat and restrict

losing trades by means of the following:

  • Have a well-documented trading strategy and stick to the strategy
  • Develop from the trading strategy a trading plan and treat the plan as the Forex Business Plan
  • Be the eternal student with an unquenchable appetite for learning
  • Stop the search for the trading “Holy Grail” – it does not exist
  • Be careful and mindful of the tips and good intentions of the “trading experts”
  • Invest in yourself and not trading bots

The foundation education also stresses the importance of risk and reward. The risk and reward

strategy that we teach emphasize a focus on more winning trades significantly larger than the

losing trades. With a risk to reward ratio of 1:2 a winning streak of 35% – 40% will make a

decent profit. This is more achievable than trying for a high percentage of 70% – 80% of the

time with a lower risk to reward percentage.

In the foundation training time is spend on calculations required to better understand where

profit and loss will occur. Learners are taught the calculation of pip values, broker spreads, lot

sizes, margin, equity, free margin and margin percentage. Classroom exercises and homework is

given to ensure an understanding of what make up the profit or loss of a trade. We are of the

opinion that merely showing on-line calculators for this important function is not efficient.

 

Types of trader also has an influence on trading costs. Scalpers and day traders normally close

their trades before end of day. Swing traders and position traders hold their positions open for

much longer periods – days, weeks and even months. The latter type of trading also incurs

costs, namely roll-over and swaps. These items are the cost that arises in the form of interest

between different banks from different countries (not central banks). Depending on the

interest differential between banks the trader must either pay interest or receive interest.

C2Wealth ensure through foundation education that the trader is aware of these facts for

interest can become a major cost element.

Trader expectation also need to be managed. C2Wealth provide ample examples of prudent

funding of accounts. An expectation to earn a R1 000,00 per month from a R100,00 account will

not be met. With prudent funding comes the importance of correct lot sizes, type of currency

pair to be traded (spread costs) and the use of risk management items.

Forex trading is not an easy scheme, but requires hard work, dedication and discipline. Forex

trading must be treated as a business and not like a casino game. Trading skills are honed when

operational trading is consistent with a documented trading plan and losing trades are seen as

learning opportunities.

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