The Concept of Probability in Trading Situations

Aug 15 • Forex Trading Strategies • 3245 Views • 2 Comments on The Concept of Probability in Trading Situations

Probability draws upon the concept of chance where something is perceived to happen whether positive or not. Strategy is defined as the method used to bring about a desired result whether the probabilities are bleak or favorable.  Foreign exchange trading is the act of buying and selling currency pairs for higher profitability.  When these concepts are combined, high probability trading strategies can be operationally defined as the collection of best practices employed in determining the likelihood of a successful trade.  This approach works best by being familiar with the analytical tools involved in trading.  Here are a few tips to get you started:

Change your approach.  There is a significant difference between using high probability trading strategies and high profit trading strategies.  The former focuses on working with favorable market indicators to wield a successful trade while the latter focuses on the profits resulting from a trade.  While the latter approach can bring about unlimited potential in profit, the former provides a guarantee for return of investments as long as the cards are played right.  The principle behind high probability trading is expressed in this relationship ratio of trade and return: 1:2.  This means for every trade you make, the return should at least be double.

Be selective.  If you are to use high probability trading strategies, you need to be selective rather than spontaneous.  You need to devote time in analyzing the charts and the direction of favorability among currency pairs.  For example, if you see that the TRIX and MACD indicators are crossing down, Stochastics and RSI are within the overly bought limits, and EMAs are following the downward direction, the probabilities of making a successful trade is high.  You can choose to enter a short position and make an exit if the trend shows signs of reversal.

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Be critical.  Coupled with selectivity is a critical approach to trading.  Maintaining criticality enables you to determine accurate entrance and exit points to avoid losses.  You can do this by careful analysis of the charts.  If anything on the chart elements is conflicting, you ought to stop your impulses from making a risky trade.  There will be a point during the day where the technical indicators seem to stabilize.  This may act as a good prompt for you to place a trade.

Rate it.  Based on your previous successful trades, you can devise your own rating system to determine your chances.  You may use a scale of 1 to 10 to rate the probability of your success.  You can add your knowledge in technical analysis to aid you in rating.  The higher the rate, the higher the success potential it has.  When you use a personal rating as a tool in high probability trading strategies, remember to stick to what you see and not how you feel.

One principle that helped successful traders is making sure that in every trade they make, profit is guaranteed no matter how much it is.  As long as you do not lose more than what you trade, you are on your way.

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