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Understand the probabilities in trading

In this blog I want to try to explain you, why understanding the probabilities in FOREX trading is so important. In general trading business is not much different from ‘owning a casino’. All casino owners know their probability numbers and know that statistics are on their side. In order to be profitable in trading you must think like a casino owner. You must know your statistics and know your winning probability over a large number of trades. To give you a good example on how probability can affect your trading results, I’ve coded a simple trade simulator.

So let’s assume you have a $10000 account and you already have a strategy or system that gives you 60% winning edge (following a normal distribution). You will not risk more than $100 per trade (1% of your $10000 balance) and you will place your orders with TakeProfit and StopLoss equal to 10pips (equal to $100 with 1 Lot size). Furthermore let’s assume your broker has a fixed spread of 1pips. Ok, now let’s go and hit ‘Simulate trades’ button several times to see what are the possible outcomes w.r.t your end balance after 1000 trades (1=winning trade; 0=losing trade).
As you can see in this configuration the end balance can be something between: $25200 and $14800, but on average you will be always in profit! So now let’s change only one parameter, let’s assume someone is trading the same system on a different broker with a different spread of 3pips instead of 1pip. Let’s repeat our experiment and see what will happen.

So after hitting the ‘Simulate trades’ button several times it becomes clear that in this configuration we will most probably lose our money! The very same system that is used in the first example will lead to a total dissaster when used on a different broker that is using only ‘slightly’ larger spread of 3pips.

So I hope, that after reading this, you wil now understand why you should know your own numbers in your own configuration before starting live trading or blaming EA’s or systems and complaining that they do not work;) Remeber this one thing: the key to success is in your own numbers!

Kind Regards,
Chris and Coensio team.  

4 Responses to FOREX = probability game

  • Dear Chirs ,

    I have understood what you have explained before. This have been one of my big doubts when I build a simply robot. ¿ I have to consider the spread, when I define the quantity of lots to obtained a profit?

    After many trials , I have arrive to the conclusion that NO. If I fixes a numerg od pips in and Excel sheet and the spread is always fix..It doen’t matter what number is , the profit will be always the same if the number of pips are achived. The spread is included in the number of pips , because in one direccion act the ASK and the other the BUY. Then the example is not well explained in my opinion

    • Hi Juan,

      Please contact me on my email, it will be more easy to communicate this way.


  • Dear Chris,

    The results are a disaster in the second simulator, but the issue is that you have set a fixed Profit/Loss of 10 pips! Your profit target should be always double your stop loss and probably more to become a profitable in this business..

    I always think of it as:

    On a series of 20 trades, assuming your profit and loss is 50% win and 50% loss.
    10 trades loss: 10 * 100 TP = 1000
    10 trades win: 10 * 200 TP = 2000

    The total is 1000 profit. double target is the key.

    • Hi Sam,

      Yes you are 100% right however as mentioned in my post, this simulated example is only to show the influence of the spread in your trading.


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Short about me

Welcome to my Blog!

My name is Chris, I'm a Dutch engineer with Polish roots. By day I'm an engineer, system trader and an internet entrepreneur, and by night I'm fighting internet crime;) I hope you will enjoy my website and my free MT4 software. Do not forget to check out my blog.
B.t.w: 'coensio' (Latin) = assessing, assessment, census, estimating, opinion, rating, taxing.

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