Forex: Trusting Probabilities and Mastering Psychology


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.


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 a Trader needs to know about the Forex Market

The Forex market came into existence in the 1970’s when the United States abandoned the gold standard as benchmark for the value of the US Dollar. Forex in itself is an abbreviation for foreign exchange and the root purpose of the market is to evaluate the currency of one country to the currency of another country.

It was in 1973 that the countries which formed part of the industrialized world decided to make their currencies freely available to trade. This immediately formed the exchange rate in terms of value of one currency pitted against another. This further led to the establishment of currency prices being quoted on a daily basis. The explosion in computer technology made foreign exchange transactions possible in most parts of the world. Due to the foreign exchange markets, the world today is truly a global village and it is possible to perform intercontinental business transactions from every corner of the world.

For a better understanding of the foreign exchange market, attributes of the market will be highlighted. This is an effort to shed light about the currency market to facilitate the move to become a Forex trader:

  • Currencies are always traded in pairs in the Forex market. For every foreign exchange transaction, one currency is traded for another, i.e. GBP/USD will translate to how many Dollars it will take to purchase a British Pound.
  • Symbols are being used to indicate currencies. The GBP symbol indicates the Pound Sterling and the USD symbol indicates the United States Dollar. Other symbols include the AUD for the AUSTRALIAN Dollar, the EUR for the European Union euro, CHF for the Swiss Frank and the JPY for the Japanese YEN to name but a few.
  • There are current approximately 150 currency pairs available which could be traded in the currency market
  • There is a market price associated with each currency pair, i.e. EUR/USD, GBP/USD, USDJPY. This price refers to how much of the second currency it will cost to buy one unit of the first currency. An exchange rate for the GBP/USD is 1.2801, then it costs 1.2801 US Dollars to purchase a Pound Sterling.

On the reverse side, to establish how much it will cost in Pounds to buy a US Dollar, the calculation is flipped, and 1 (one) is divided by 1.2801 to give answer of 0.7811. It therefore costs 0.7811 US Dollars to buy one Pound. The price of the currencies constantly fluctuates as global transactions occur, 24 hours a day during the week.

  • A pip is the fourth decimal in place in a currency pair. When the Japanese Yen is involved as the second currency, the pip is the second decimal. When the price of the GBP/USD moves from 1.2800 to 1.250, a profit of 50 pips have been made – if you were in a buy transaction. If you were in a sell transaction and the price moved from 1.2800 to 1.2750, you would have a 50 pip
  • The profit made depends on how much of the currency were bought or sold. Currency pairs are transacted in lot sizes. The standard lot size is 100 000 units, the mini lot size is 10 000 units and the micro lot size is 1 000 units. A standard lot size pip is worth $10,00, the mini lot size is worth $1,00 and the micro lot size pip is worth $0.10. This is on the assumption that the accounting of the trade account is in US Dollars.
  • For any pair where the USD is the second currency, the pip values in the previous paragraph applies. However, if the USD is quoted first, the pip value will be different. Example: The pip value of the USD/CHF (Swiss Franc), the normal pip value is divided by the current USD/CHF exchange rate. Thus, a micro lot size is worth $0,10 / 0.9435 = $0.1060, where 0.9435 is the current price of the pair, and subject to change.
  • The JPY pairs (USD/JPY), follows the same process, but is then multiplied by 100.
  • In terms of trading, the first currency in a trading pair is always the directional currency on a forex chart. In the GBP / USD chart, when the price is moving higher, it means the Pound Sterling is moving higher relative to the USD. Similarly, if the price on the chart is falling and moving lower, then the Pound is declining in value relative to the US Dollar.
  • There are three forms of commissions used by brokers in forex. These commissions are the cost of forex transactions. The commission structures are not universal to all brokers and each broker applies the structure as they would see fit. The cost structures are (a) a fixed spread, (b)a variable spread; and (c)a commission based on a percentage of a spread.

The spread is the difference between the bid price (what the broker is prepared to pay for your currency) and the ask price (the price the broker is prepared to sell the currency)(The ask price is always higher than the bid price)

In a quote “EURUSD: 1.4952 – 1.4955” there is a difference of 3 pips (as calculated on the fourth decimal). This difference is called the spread. With a broker offering a fixed spread, the trader will always pay 3 pips transactions costs.  In the case of a broker with a variable spread, the spread would move up and down, depending on the currency pair being traded and the market volatility level.

Some brokers charge a small commission, sometimes as little as two-tenths of one pip and the trade will be passed on to a larger market maker with whom a relationship exists. This larger market maker could be able to provide a very tight or small spread that only larger traders could access.

  • Forex interest or rollover is another cost to take into consideration. Rollovers are the interest paid or earned for holding a currency transaction open overnight without settling. Each currency has an overnight interbank interest rate associated with it, and because forex is traded in pairs, every trade not only involves two different currencies, but also two different interest rates. The rates involved here are not central bank rates, but the overnight interest rates at which banks borrow unsecured funds from other banks. Should the interest rate on the currency the trader bought be higher than the interest rate of the currency sold, interest would be earned on the transaction. If the interest rate on the currency bought is lower than the interest rate on the currency sold, the trader will pay rollover interest.
  • Rollover rates on a Wednesday is three times higher than on a Tuesday. This is to account for the fact that banks are globally closed over the weekends and therefore the interest for the weekends are made up on a Wednesday.

With these concepts the new traders should have a better understanding of what is happening when there are movement on a forex chart. It will be easier to identify the profit potential available from chart movements.


The United States / China Trade War and Forex Trading

The Trade War Explained

Even before Donald Trump became president of the United States, he held the believe that China manipulated its’ own currency for economic advantage. Whether the believe was actually true is another matter.  But being the president of the United States, Donald Trump’s administration has embarked on a trade war with the Peoples Republic of China.

The 2018 trade war started with a single safeguard by the United States on washing machines and solar cell panels in January. This safeguard has pick up speed escalating into a full scale tariff war. At the core is President Trumps’ belief that trade deficits with countries around the world are hurting the U.S. economy and in particular manufacturing.

The reaction by China is a tit-for-tat response by imposing tariffs on $250 billion worth of Chinese imports. Tariffs were imposed especially on US agricultural goods.

The trade war has increased global economic uncertainty while the USD is strengthening against all major currencies, not least of which is the Chinese yuan. The effect is that US exports become more expensive and thus less attractive. True to his nature has President Trump tweeted that the Chinese and Europeans are manipulating their currencies to hurt the US. The Feral Reserve was also not spared. The Fed’s interest rate increase pushed up the exchange value of the Dollar.

The Trump administration has targeted China, the 27-member European Union and neighbors Mexico and Canada with trade tariffs. Despite a warning by President Trump to these countries not to retaliate in kind to US tariffs, the affected countries did just that.

China took some sting out of the US tariff sting by allowing its currency, the yuan to slide 9% against the dollar. This is the lowest level in several years making Chinese exports much cheaper. For the Chinese yuan to fall that far was a conscious decision, because Beijing still largely controls the value of its currency and could have intervened to stop the slide. In some ways the move to weaken the yuan was quite easy as the currency had steadily gained in value the prior year, providing some room to fall without causing too much damage.

Now, with Trump’s tariffs set to escalate even further, there are fears that China could just let the yuan fall as it did this summer, essentially unleashing a currency devaluation that would further ramp up bilateral tensions.

In late September, the United States levied 10 percent tariffs on $200 billion worth of Chinese goods, and the tariff is scheduled to rise to 25 percent in January. Trump has also threatened additional tariffs on $267 billion worth of Chinese products, adding up to essentially everything the country ships to the United States.

What happens to currencies when tariffs are imposed?

When a country imposes tariffs on another country, doubt is created on the imposed country’s economic outlook and raises the likely outcome of a retaliatory tariff decision. When there are doubts on the economic outlook of a country, investors are more likely to pull their capital from the country and that could lead to currency declines.

A decline in currencies normally lead to price instability and enhanced volatility.

Trade Forex with the Chinese Yuan

The currency of the People’s Republic of China is known as the Renminbi (directly translated as the People’s Currency) with the actual bank notes and coins themselves being called the Chinese Yuan. This is similar to the UK currency being known as Sterling, with the notes and coins being referred to as the Pound. The symbol used for the Yuan is ¥, and there are three Forex codes connected with this currency: RMB, CNY and CNH (which refers to the offshore tradable currency). The Chinese Yuan is used across the People’s Republic of China but not in Macau or Hong Kong (although it is sometimes accepted in these two regions), and it is not accepted as legal tender in Taiwan.

The rate of the CNY is set by the central bank, the People’s Bank of China, and it has a narrow band of variation, basing its value against several international currencies. The Yuan was originally pegged to the US Dollar, and this has been the case off and on over the last few years, with the most recent de-pegging occurring in 2010.

CNY/USD Explained

The currency pair CNY/USD is becoming increasingly popular with all kinds of investors due to the rise in interest in the Chinese economy. This pairing refers to the Chinese Renminbi currency and the US Dollar.

The Yuan is now the ninth most-traded currency worldwide. Each Yuan is made of 10 Jiao, and each Jiao consists of 120 Fen.

The CNY/USD pair is an exotic currency pairing because there is less trading of this pair when compared to the Cross and Major pairs, there is less market liquidity, which leads to a higher cost of trading.

There are several advantages to choosing to trade the exotic CNY/USD pair:

  •  Predictability – As there is a lower trading volume and slower trading pace in the CNY/USD market, price action can be predicted more easily, making long-term trades a possibility.
  • Fewer traders – CNY/USD transactions have a higher cost than that of major pairs, and when combined with the lower exposure of this pairing to the global Forex trade community, it means that speculators and casual investors are excluded from the market. This results in fewer traders.
  • Opportunities for diversification – The CNY to USD trade usually attracts more experienced investors wishing to develop a more diverse portfolio of investments. The CNY/USD market enables them to try a more unusual market, which may bring a greater profit should the trade work out successfully.
  • Challenging opportunities – As the CNY/USD market is quite unique, it represents a more challenging opportunity for experienced Forex traders, which enables them to create their own strategies and formulas in order to achieve a higher level of trading success.

 Forex Brokers in China

With more than a billion population and fin-tech industry on the rise, the world’s second-largest economy is a country with huge forex market potential. Nonetheless, China is in fact one of the most frustrating jurisdictions in the world for retail forex brokerages.


The reason for this is the policy of the Chinese government, which doesn’t seem too keen on the forex industry, to put it mildly. There was a ban on advertising of forex trading and related services on Baidu, the largest search engine operator in China. It was lifted, however there are still a number of impediments to forex brokers in the country, such as the unclear license application procedure, problems with cross-border payments, as well as a leverage cap of 1:20, to name a few.

The previous paragraph needs to be seen in the light of the fact that first forex retail license has been allocated on the 19th November 2018 to a Hong Kong brokerage named Guo Tai Jun. The broker is now allowed to enter the interbank forex trading market and carry out “spot FX, futures and swap currency trading operations.”

More importantly, people in mainland China will now be able to trade with Guo Tai Jun without needing to have a Hong Kong bank account with HKD in it.

There are foreign forex brokers in China. There have been concerns about the Chinese authorities shutting down non-Chinese FX brokers after they banned crypto currency trading in the country. Yet, it appears that the brokers licensed by reputable financial agencies such as the FCA in the UK or ASIC in Australia, are out of trouble, especially if they have physical offices in the country

Yet another option for foreign brokerages who wish to operate in China is through a joint venture with a partner that is 100% Chinese owned.

Can you make a living trading Forex?

Can you make a living trading Forex?


One of the most repeated questions asked regarding Forex trading is: ”Can a person make a
career out of trading Forex?”

This question is asked not only by persons outside the realm of trading, but also by persons
who have completed some form of training and are now wandering into Forex trading. No
doubt is this a difficult question to answer. There are many people outside Forex trading who
will answer in the negative given the perceptions that do exist of Forex trading.

The short answer to this question is simply: “Yes you can”. But like most things in life, this is not
clear cut and in black and white. The answer needs to be qualified to enable those persons who
are considering a career in Forex to make an informed decision.

Forex as a Career and Business

The first item to be aware of is the fact that if a person wants to change from a paying
profession to become a Forex trader is the fact that to succeed Forex needs to be seen as a
business and not as a part time hobby.

And like any other business will the Forex business require funding; starting capital to fund your
business and open a live trading account. Being under-funded will not result in a living wage
with Forex. The amount required to operate as a full-time trader will differ between individuals.
As a rule of thumb, to effectively manage the risk on every trade, a decent amount of money is
required in order to trade a large enough position size to make enough money to support the
trader while at the same time not risking too much of the account balance.

Part time trading for extra income is relatively easy at the early stages of a trading career. But
the period of part time trading should be utilized to learn to trade with consistency rather than
accumulating wealth. Even the part time trader who has a large sum of money available should
focus on getting consistent results. A profitable track record and self confidence will follow in
the wake of consistency. Not focusing on the mechanics of successful trading will eventually
lead to losses.

It is also possible, like with any business, that things can go horrible wrong. To counter this
possibility, the independent trader is advised to have reserve cash at hand to cover for such an
eventuality of running out of trading funds.

Tools required to become an independent trader

An independent trader requires a set of tools to become a trader of note. The following
paragraphs will highlight some of the requirements.

Educations and Training

It is important to obtain the very best education and training before considering a career in
Forex trading. The market is constantly changing, and trading skills always need to be updated.
Forex training and education is required to familiarize the novice trader with all the concepts
and terminologies. In the high risk Forex market not only the concepts and terminologies, but
also the art of trading strategies and Forex maneuvers need to be mastered. Forex education
and training should possibly enhance with the guidance of a professional mentor.

Forex education and training needs to become a life-style. However, education and training are
no guarantee for success, but will move the odds to be more favorable.

Reliable Forex Broker

Forex brokers are firms that provide currency traders with access to a trading platform that
allows them to buy and sell foreign currencies. A currency trading broker, also known as a retail
forex broker, or forex broker, handles a very small portion of the volume of the overall foreign
exchange market. Currency traders use these brokers to access the 24-hour currency market.
Before trading, a forex broker will require customers to deposit money into their account as
collateral. However, through leverage, customers can trade larger amounts than what is
deposited in their account.

Most major forex brokers will allow prospective clients to use a practice account so that they
can get a good understanding of what the system is like.

MT4 Trading Platform

The MT4 platform has become a market standard and there is a good reason for that. It is the
most advanced and trustworthy Forex trading platform available on the market, and even with
its complex and advanced features, the user interface is friendly and intuitive, making it an
attractive option for new and experienced Forex traders alike.

Doing the right things in Forex Trading

Perusing a career as Forex trader requires that the right things being done correctly. Trading
the Forex market does not only depend on being sufficiently funded and the attendance of a
training course. They are very important considerations, but other items required for successful
trading include the following:

  • The learning and mastery of an effective trading strategy with which the trader is
  •  Designing a tangible and working forex trading plan where items such as the following are being spelled out:
    • The risk to reward scenario
    • Forex position sizing
    • Stop-Loss distance
    • Entry and Exit strategy
  • Setting up a trading journal to create a track record
  • Adhering to careful money management principles

Psychological Factors

Forex trading is the one place where human attributes and stressful psychological factors play a
crucial role.

Trading Forex is stressful at its’ best. The market is highly volatile, ever changing and what
worked yesterday does not apply today. Forex trading is the place where fear, hope, greed,
excitement, elation and depression meet.

The person attempting to trade Forex who has little self-discipline and not in control of his/her
emotions has little chance of becoming successful in Forex trading.

All Forex traders makes mistakes and loses money. It is the nature of the beast. We all have to
live with it. The successful trader learns from it and is better prepared for the next round.

Is a career in Forex trading possible?

The conditional answer to the question has been given. A well-funded account, attendance of a
quality training course and an understanding of the risks involved, the spirit of
entrepreneurship and the preparedness to work hard in a disciplined manner will set winners
apart from the losers.

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