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.

Can you make a living trading Forex?

Can you make a living trading Forex?

Introduction

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
    comfortable
  •  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.

More Information on our Website:
http://www.c2wealth.co.za
https://www.facebook.com/C2Wealth/
https://twitter.com/c2wealth