Forex Trading by Stacking the Odds in Your Favour

By: David Lloyd
Copyright (c) 2008 Forex Trading Alerts

Often forex trading is compared to gambling. Some who follow the random market theory support this view. However some technical analysis experts would argue that technical analysis Forex techniques stack the odds in the favour of the trader. Sound money management and risk management are another ways of stacking the odds in the favour of the trader

How much do the odds have to be in the favour of the trader for them to make money? Often a trading success rate of 70% to 80% is assumed as the requirement to make money. At 70% your gains would be $700 (assuming gains and losses of $100 per transactions) and losses would be $300 resulting in an overall gain of $400. Let's take a closer look at this assumption.

In Currency trading, when the price reaches strong resistance or support, the question is: will the price bounce back or violate the barrier? Good channel traders and support and resistance traders will tell you that in general there is a 70% chance of a bounce and only a 30% chance of a breakout. These are important statistics.

The other statistic is that when there is a false breakout (60% of the time) it will only go say 25 pips past the barrier and then be forced back. Knowing this statistic is another big advantage for traders. Most indicators or trading methods have these kinds of statistics.

The risk management technique that experienced traders use is the risk compared to reward ratio. Many will only enter trades that allow them to gain 200% of what they risk (their stop loss). This is a particularly powerful way of trading as they make $200 on successful deals and only lose $100 on positive deals. This means that if they had a 50% success transaction success rate, on 10 transactions, they would earn $ 1000 on successful transactions and only loose $500 on unsuccessful ones. A profit of $500 with only a 50% success rate. Much better than the $400 gain calculate above.

Just like card counters who make money from BlackJack you need to develop the skill of stacking the odds in your favour when Forex trading. This means knowing technical analysis very well and knowing the characteristics of the forex market very well.

Clever money management is also used by BlackJack card counters. When the packs are rich of high value cards they would progressively increase the value of their bets. They would bet very low or not participate when the odds are not favourable. This is one of the most neglected aspects of Forex trading and as a Forex trader you need to develop this skill.

Remember the trader above who achieved a 50% success rate and made money because a 200 to 100 return on risk ratio was used. Now imagine that only 1 lot was used for higher risk trades and 2 lots were used higher probability trades. The gains will now be $2 000 ($200 x 5 x 2) and the losses $ 500 ($100 x 5 x 1). A $ 2000 gain compared to $ 500 loss. Now we talking. We are only using a 50% success rate. This $1500 profit at 50% accuracy compares well with the $400 profit at 70% accuracy.

The above is only an introduction of how some successful traders do not let losses worry them as they have the odds stacked in their favour. Many trading firms (including ours) take their traders through a course of Casino game gambling odds to show them how easy it is to make money on the forex when you stack the odds in your favour.
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