We've all heard the statistics about how hard it is to make money in foreign exchange trading. While some traders may brush off the commonly used statistic that 90% of all forex trades are losses, common sense says that while that number may be off by a few percentage points on either side, it gets tossed around so frequently because it is likely true. A novice forex trader may see that his odds of success are a meager 10% and decide to pass on forex trading altogether. The trader simply thinks this is an act of prudence that protects his capital and he thinks he has done the right thing.
The reality is every trader enters the game with the same odds of success and those odds are 50-50. What many traders fail to realize is that they control their own destiny. Meaning you and only you control your trading success. Of course forex is one of the most volatile financial markets in the world and EVERY trader is going to suffer losses. That's just the reality of forex trading. It's the size of those losses that matters.
Believe it or not, you can make 10 trades and have seven losses and still wind up profitable. A rookie trader may debate this, but it's really just simple math. If your three winners are big enough, they can outweigh your losers. So how do you go about keeping your losses small? Discipline should always be your top priority and along the lines of discipline is to NOT view the forex market as you would a casino.
The casino analogy is relevant because the people that lose the most money at the blackjack and craps tables make the same mistake losing traders make. They fail to understand probabilities. You probably learned a little bit about probabilities in high school math and if you ever doubted their application in real life, erase that doubt. Let's use the blackjack example. You're playing $20 hands with your buddies at the Bellagio and one of your buddies is on a cold streak. He's lost three hands in a row ($60). He erroneously believes that he can't possibly lose a fourth hand in a row, so he ups his bet to $60 on the fourth hand.
Good idea? No. Not at all. Not under any circumstances. The reason this is a losing strategy is because the outcome of the last hand has no bearing on the next hand. None whatsoever. Under this scenario, the player is chasing his losses, desperate to break-even and then turn a profit. Applied to forex trading, this strategy is even more dangerous.
Let's assume you usually trade just one standard lot per trade and you find yourself on a little bit of a losing streak. It happens to everyone, but the winners find a way to deal with it and keep themselves in the game. After several losses, you decide to start trading two or three lots, markedly increasing your risk exposure with no empirical evidence that this strategy is successful.
The bottom line is the market doesn't know from whom it is taking money and to whom it is giving money. The market doesn't discriminate. It knows there are always going to be winners and losers and it doesn't care who they are. That's why you have equal odds of success or failure on every trade you place and that is why upping the ante after a losing streak is a bad idea. In fact, many veteran traders will trade smaller sizes if they're on a cold streak.
Put another, as we said no evidence suggests to support the notion that raising your bets will result in more winners, but evidence does suggest to support our claim that this is a strategy that fails far more than it wins, so don't use it.