New traders are mostly very prone to misconceptions. Because of this widespread misconception and error, bigger trading problems can be encountered. However, if you properly address these misconceptions and correct its underlying errors.
Probability As Basis of Trading Actions
Having this very important element of trading will help get others right. Trading results are determined by probability. Therefore, trading actions must be determined by probability as well. This does not only apply in Forex trading but by any other trading system across the world. Sadly, this very important aspect of trading is commonly misunderstood.
Using Numbers To Your Advantage
Trading should not be treated like a bank, where you can easily withdraw money. Trading should be seen as a business and therefore, you need to keep records of your every move. This very simple thing, but generally, time-consuming will greatly affect your success rate. Also, using the number to fulfill a perfect record of activities is a must. This will help ensure that everything is under control.
One of the major things to do is to create trading rules. These trading rules will soon be formulated into a plan that you can use in trading. Otherwise, if you fail to make these numbers into a useful trading plan, everything will become meaningless. These numbers are derived from your trades, taken for this particular reason.
So, how do we create trading rules and plans using numbers? To be able to create an excellent trading plan, you must first evaluate the system that surrounds it. You may check the activities of the past, evaluate in the current time, and use to for your future trading.
How To Evaluate The Past Performance
Backtesting is a term used when evaluating past trading performance. Using a computer, you can backtest the system. Currently, there are already a lot of trading platforms that offer backtest capabilities. You can either use your computer code to write the rules or backtest manually. In whatever ways you choose, it is important to note the triggering points for you to create effective trading rules for your trading plan.
How To Evaluate The Future Thru Real-Time Trading Records
As for real-time trading, you can take two options. You can do the paper trade or trade using real money.
Details Included In Your Trading Records.
Certain records need to be included such as;
- Opening Price
- Opening Date
- Initial Stop
- Number of Shares
- Exit Price
- Exit Date
- Reason For Entry
- Reason For Exit
- Trading System
Traders do make errors, after all, they are just human beings who are not perfect. However, this error can be pretty destructive. For instance, your win rate is at 70%. This means that your chances of winning on the next trade are at 70%. That’s a huge score. But it’s not that easy. Your system might predict a 70% or 80% win rate but your next trade will still and always will be at 50:50. This might be mind-blowing, but unfortunately, this is nothing but true. This is all because of these two important things:
Each trade is unique. It is different from the one you did before and the one after. Saying this, it proves that trades don’t have a memory of its own. These trades do not know that you consecutively lose or you won a couple of times.
Each trade you make will be at a 50:50 ratio. This is all because Forex trading only has two outcomes – you win or you lose.