A Light-hearted Look At Probabilities

Filed under: Learn Forex Trading |

Screen shot 2013-08-13 at 10.20.17As trading forex is such a serious business, for today’s forex-related article, I would like to move down a few gears and take a bit of a light-hearted look at probabilities and why they are important.

 

Let’s start with the national lottery. If you play the national lottery, you will know that you have to choose six numbers between 1 and 49, and if you get all six numbers, you stand to win millions of pounds! It really doesn’t seem that difficult – but I’ve never had more than four in the past twenty years! So in over a thousand times of playing (once per week x 52 weeks x 20 years), the best I have done is four numbers. However, let’s now consider the probability of winning – which is known to be around 14 million to 1. That is 14,000,000-1! If that were a horse – would you bet on it? If it were a horse, then it would have to be a horse with no legs! And who would bet on a horse with no legs?

 

In the world of forex trading, probability is also very important. Generally, the larger your risk-reward scenario, the less chance you have of a winning trade. If you have an average risk-reward of 1:2, then a winning rate of just 40% will make you a lot of profit. There are also certain setups that have a higher probability of winning than others – and this is something that you can work out over a long series of trades.

 

In summary, probability is probably something that most people do not give enough thought to. Life is a series of risk-reward decisions, from crossing the road, to eating a fish with bones. In the forex markets, these risk-reward decisions are omnipresent, and you need to constantly assess whether a trade is worth taking or not.

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