You know what this blog is going to be about. Let’s get right into it.
There is a lot of talk about trading being the same as gambling because it’s all based on luck. Whether or not you think it’s true (to read up on this topic you can take a look at a blog we wrote on the subject), for the purpose of this piece let’s believe this statement.
Where do we go from here?
In gambling, the casino always wins. So if it is really a gamble, your best bet is to trade like the casino. You want to be on the winning side of course.
How does one trade like a casino?
Let’s look at the casino’s strategy first.
If we look at the game of roulette, the casino’s chance of winning are 20 out of 38, and the player’s are 18 out of 38.
20/38 is 52.7 and 18/38 is 47.3.
This difference is because there are two green sections on the wheel which also mean a win for the casino.
So the casino has a 5.4% more chance of winning. They win because of statistics and probability.
Replicating that model
People lose more when they are wrong and they make less when they are right.
Profits are taken from fear of losing more. Losses are not cut because traders find it hard to accept that loss and so false hope keeps them hanging on to the notion that the prices will eventually come up. In the end, more often than not, this results in them losing even more.
Look at historical data.
This is the key!
This is why technical analysis is so widely used. We have talked about retracement levels, support and resistance, and Fibonacci etc. here before so the details will not be repeated here (you can however find information on these topics in the Education section).
Just to summarize them briefly though, these are all repeating levels in forex. Support is a lower limit that is hit before price bounces up again and resistance is the upper limit which will be hit before price falls back down.
Repetition is the trader’s only friend in the market.
Although there is no guarantee of these happenings, the probability of a price bouncing back up from a support level is definitely higher than 50%. So it’s better than the regular odds.
Why does repetition take place?
The simple answer to that is: because of traders.
If you as a trader believe that the current price actions in the market will follow historical patterns, it is very likely that the other traders are thinking the same.
At the end of the day, in forex it is the traders who decide how the price will move. And their decisions are based on beliefs. In a way, it is a cycle- a little like Tinker Bell. If you believe she is real, she is real.
Support and Resistance and retracements levels are all outcomes of psychological patterns.
When patterns repeat, it means there is now more than a 50% chance of the trader winning, granted they were betting on that repetition. The trader is now at the casino’s position.
Of course there is still the possibility that Support or Resistance will be broken, and that is accounted for in the remaining 40% or so. The point is, that you have a better chance now.
In forex, or gambling, there can be no guarantees. Probability, however, is always a part of every occurrence on the face of this planet. Therefore, your only chance at winning consistently is by understanding and calculating those probabilities.
In forex there is a whole system of analysis, the technical analysis, and services like signals that help you evaluate this chance or probability. Take your time understanding it and make the most out of forex.
We do realize this might have come across a little disappointing as this too is not a shortcut. It requires learning and investment of time, but that is how you know it is the real deal.
If you’re trading in forex with the same kind of hope the gambler has, of making thousands overnight, the result for you will be the same type of losses gamblers face. There has to be a scientific method behind trading.
We hope this still was able to show you why so much value is placed on past data in forex.