Not Entering A Trade Reduces The Chance Of Loss By 100%

Category likeness to » Forex articles. Added to Authentic Society 42 years ago.

Risk management allows us to have control over a few things in the market. Nobody knows where the currency exchange rate is going to go next for any particular pair. This is because a forex chart gives us a fraction of what is going on in the world's currency markets.

Many amateur traders fool themselves that when they look at their favorite currency pair chart they get the entire picture. With a little commonsense thinking we can understand that we are only seeing a small fraction of what's going on with the price. Why does this occur? To answer this question we will need to think about what exactly happens when we enter a trading position. I have learned a fair share of practical information from Forex Patterns and Probabilities by Ed Ponsi and here are my thoughts so far.

Imagine a coin that has two faces: on one side there is a USD and on the other, EUR. When we enter a long position on the EUR/USD currency pair we are said to be buying EUR. This also automatically assumes that we are shorting (selling) the USD. Had this not been true, the market wouldn't be called the exchange market − you can't buy both sides of the coin at the same time!

Now, imagine traders all over the world − India, Russia, United Kingdom, The US, Australia, and so forth − making trading decisions at the same time. Some of these traders go short. Some of them go long. But no matter what direction of the trade they take at any given moment, those who long EUR/USD also short the USD and those who short EUR/USD, also long the USD.

Because several different pairs exist that include the U.S. Dollar (EUR/USD, or GPB/USD, and so forth) it is possible for the EUR/USD pair to be affected by the global interest in any other such pair that has USD on one side of the coin. Depending on what pair most traders' interest lies in, that pair can influence the global interest in other pairs that have the same currency unit half. These complex and simultaneous dynamics of the market can be observed by looking at the heatmap indicator provided by several software forex trading tools.

Because the nature of this market is not deterministic, we do not have a choice over the direction of the market. The best we can do is to work at reducing the odds of loss on our trading account. The market is unpredictable, but risk control provides us with a few opportunities to make realistic choices. Let's focus on those things that we do have control over instead of trying to predict the market's next move.

You don't have to enter a trading position (place a trade) at any time. This is one of the things we totally have control over in the forex market. Making the decision to not enter the market at any time and remain, what professionals call flat, will reduce the chances of loss on that decision by 100%. Professional traders only enter a trade if they are absolutely confident about making that decision. If you are unsure, get out of the way of the freight train.

Some would say, "What a joke! − wouldn't entering a trade every so often, as I please, improve the chances of making more money?" Absolutely not. There is no correlation between the number of trades someone makes and the amount of money that trader will profit from. Market is big enough to allow us with an abundance of opportunities and entries. We don't have to enter every single time there is an opportunity, if we feel unsure about it. Some of the market conditions and technical analysis patterns can be interpreted in two or more than two ways. Don't pull the trigger too often. Instead spend your energy on researching additional material. For example, learn about how the interest rates affect the currency pairs − be patient − and make at least one of your next trades a big winner.