| The trader's fallacy is one of the most fashionable and treacherous ways forex traders can go wrong |
Forex trading strategies and the trader's fallacy
The trader's fallacy is one of the most fashionable and treacherous ways forex traders can go wrong. This is a big pitfall when using any manual forex trading system. It is often called the "gambler's fallacy" or the "Monte Carlo fallacy" of game theory and it is also called the "opportunity maturity fallacy
A trader's fallacy is a powerful temptation that takes many different forms of a forex trader. Any experienced Forex gambler or trader will know this. This is the absolute conviction that since the roulette table has just achieved 5 red wins in a row, the next round is likely to be in black. The way the trader's fallacy appeals to the trader or the gambler is when the trader begins to believe that because the “schedule has ripened” concerning the black color, the trader also raises his bet to take advantage of the “increased odds of success”. This is a leap into the black hole from "negative expectations" and a step on the road to "trader's ruin".
'Anticipation' is a technical statistical term for a relatively simple concept. For forex traders, it mainly depends on whether or not any trade or series of trades is likely to turn a profit. The positive expectation set in its simplest form for Forex traders, is that on average, over time and many trades, for any Forex trading system, there is a possibility that you will gain more money than you will lose.
"Destroying dealers" is the statistical certainty in the gambling or forex market that a player with more equity is more likely to end up with all the money! Since the forex market has functionally unlimited funding, the mathematical certainty is that over time a trader will inevitably lose all of their money in the market, even if the odds are in the traders' favor! Fortunately, there are steps a forex trader can take to prevent this! You can read my other articles on positive expectation and trader ruin for more information on these concepts.
Return to the trader's fallacy
If there is a random or chaotic process, such as rolling a dice, flipping a coin, or the forex market appears to move away from normal random behavior throughout a series of normal cycles - for example if a coin flips 7 heads in a row - the gambler's fallacy is that The irresistible feeling that the next face has a higher chance of appearing. In a random process, like flipping a coin, the odds always remain the same. If the coin is flipped, even after 7 consecutive heads, the odds of the next face appearing again are still 50%. The gambler may win or lose the next roll, but the odds are still only 50-50.
What often happens is that the gambler will multiply their mistake by raising their bet on the expectation that there is a better chance that the next slot will be tails. He is wrong. If a player consistently bet this way over time, the statistical probability of losing all of their money is almost certain, and the only thing that could save this turkey is an incredible streak of luck.
The Forex market is not random, but it is chaotic and there are so many variables in the market that true prediction goes beyond current technology. What traders can do is stick to the odds of known positions. This is where technical analysis of charts and patterns in the market comes into play along with studies of other factors affecting the market. Many traders spend thousands of hours and thousands of dollars studying market patterns and charts to predict market movements.
Most traders are familiar with the different patterns used to help anticipate the forex market movements. These chart patterns or formations often come with colorful descriptive names such as "head and shoulders", "flag" and "gap" and other patterns associated with candlestick charts such as "swallow" or "hanging man". Tracking these patterns over long periods can lead to an inability to predict the "potential" trend and sometimes even the value by which the market will move. A forex trading system can be designed to take advantage of this situation.
The trick is to use these patterns with strict mathematical discipline, which is something very few traders can do on their own.
A very simplified example; After observing the market and its chart patterns for a long period, the trader may discover that the "bullish flag" pattern will end with a bullish movement in the market 7 times out of 10 (these are "fabricated numbers" only in this example). So a trader knows that during many trades, he can expect a trade to be profitable 70% of the time if he continues to buy on a bull flag. This is his forex trading signal. If he then calculates his prediction, he can create an account size, trade size, and stop-loss value that ensure a positive expectation for the trade, and if the trader starts trading this system and follows the rules, he will make a profit over time.
Winning 70% of the time does not mean that the trader will win 7 out of 10 trades. A trader may incur 10 or more consecutive losses. This is where a forex trader can run into trouble - when the system appears to have stopped working. It doesn't take a lot of losses to induce frustration or even a bit of despair for the average young trader; After all, we are only human and suffer losses! Especially if we followed our rules and were stopped from trades that would later turn profit.
If the forex trading signal appears again after a series of losses, a trader can react in one of several ways. Bad Ways to Respond: A trader can think that a win is "deserved" due to repeated failure and making a larger trade than usual hoping to recover losses from losing trades in the hope that his luck is "due to change". The trader can place and hold the trade even if it moves against him, and incur bigger losses in the hope that the situation will change. These are only two ways to undo a trader's fallacy and will likely result in the trader losing money.
There are two correct ways to respond, and both require "resolute discipline" which is very rare for traders. One of the correct responses is to "trust the numbers" and simply place the trade on the signal as usual and if it turns against the trader, immediately again close the trade and make another small loss, or the trader can just decide not to trade this and observe the pattern long enough to ensure that it is with certainty. The statistician suggests that the model has changed the probability. These last two forex trading strategies are the only moves that will fill a trader's account with gains over time.
Forex trading robots - a way to overcome trader fallacy
The Forex market is characterized by chaos and is influenced by many factors that also affect a trader's feelings and decisions. One of the easiest ways to avoid the temptation and exacerbation of trying to incorporate thousands of variables into forex trading is to adopt a mechanical forex trading system. Forex trading software systems that rely on forex trading signals and currency trading systems with carefully thought out automated forex trading rules can remove a lot of frustration and speculation from forex trading. These automated forex trading software provides the 'discipline' necessary to achieve truly positive expectations and avoid the risks of trader ruin and the temptations of trader fallacy.
Automated forex trading systems and mechanical trading software enforce the trading system. This keeps losses small, and allows winning trades to run with a built-in positive forecast. Forex made easy. There are many excellent online forex reviews of automated forex trading systems that can perform an online forex trading simulation, using demo forex accounts, that the average trader can test for up to 60 days without risk. The best of these programs have 100% money-back guarantees. It will assist a lot of the trader in choosing the best compatible forex broker with online forex trading platform. Most of them offer full support for creating demo Forex accounts. Beginner and experienced traders can learn a colossal amount just by running automated forex trading software on demo accounts. This experience will help you determine the best forex trading software for achieving your goals. Let the experts develop winning systems while just testing their work for profitable results. Then sit back and watch forex automated trading robots earn money while making profits.
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