Guest post from tradeforexfundamentally.com
The need for certainty
You want to know how to win and you want to know for certain that your strategy is going to work. But the market is an inherently uncertain phenomenon. You’ve probably already heard of the return that your strategy produces, or you’ve seen multiple examples of it in action by the instructor of the course you got—so why don’t you execute it with confidence and instead consider hopping to another system after a few losses?
It’s because you need to know for sure. You need hard evidence that it’s going to work consistently. So what can you do to make sure?
The good news and the bad news
Bad: There’s never certainty in the markets despite the claims of all of the “surefire” strategies and systems sold out there—markets change and we must adapt our strategies to the changes, because systems that worked in the past may not work so well in the future.
Good: Making money trading forex is almost like a coin flip game, where you win $1 if it lands on heads and you lose $1 when it lands on tails. However, if you could do just a few tiny things to make the coin heavier on heads, then you have an edge over your opponent. What’s an edge? As Mark Douglas, author of Trading in the Zone defines it: “an edge is nothing more than an indication of a higher probability of one thing occurring over another.” If you spot a pattern that usually precedes a price movement and the amount you win is larger than the amount you lose, you have an edge. The problem is, if you don’t take this into account, the people who taught you the strategy probably only showed the cases where the strategy worked, and ignored the losers, leading to a belief that the strategy was profitable when in fact, it didn’t have an edge.
What you can do to best prepare yourself for victory on the forex battlefield
1. Make sure that your system has a positive expectancy based on past data. We want to make sure we have an edge as discussed above, right? In order to check that, do the following: First, multiply your winning percentage (e.g. if you win 4/10 trades that’s a 40% win rate) by the amount of pips of your average win. Second, multiply your losing percentage by the amount of pips you lose on average. Subtract the second number from the first number. This is your expectancy, or how much you should expect to win on each trade. If that number is not greater than 0 in a sample of at least 30 trades, your system is likely to fail miserably.
2. Make sure that the system makes sense and is based on how the market actually works. Many traders don’t achieve forex success because they simply don’t know what they’re doing. If you want to get good at anything you should focus on really understanding it and mastering it. Make sure there’s a real reason for why you take a trade besides just a statistical likelihood of success. For example, I feel comfortable fading a news rally if there wasn’t much of a surprise in the economic data and price is approaching yesterday’s high, because I know other traders are also realizing the move was nonsense and they’re eyeing the resistance level as well. On the other hand, I would be very wary about buying a currency solely because its fast moving average crossed over its slow moving average, because that’s just an indication of 2 lines moving and isn’t really based on the underlying behavior of the market.
Do these two preparation items before anything else and your confidence will soar as a trader. Furthermore you’ll be able to stick with your strategy through the occasional and inevitable losing streaks, knowing that you’ll win, instead of playing the losers’ game of hopping from system to system.
Kris Matthews http://tradeforexfundamentally.com