MQL / Trading

Forex Trading: When does Luck Matter?

Forex Trading: When Luck Matters

I hate to use a gambling analogy when discussing FOREX trading. But it is just so appropriate.

Most experienced FOREX traders would be offended if you compared them to a gambler, as well they should be.

There is a distinct and extremely important difference between a responsible FOREX trader and the typical gambler. The difference is expectancy. In this case positive expectancy.

Positive expectancy means the “game” you are playing, if played long enough, will yield positive results.

Negative expectancy is just the opposite. If a “game” with negative expectancy is played long enough, the outcome will be negative.

Casinos are built on games of negative expectancy (from the gambler’s point of view, not the casino owner’s). Most gamblers know this but hope to get lucky.

No FOREX trader in her right mind would play a game, or follow a trading strategy, with a negative expectancy.

This is the fundamental difference between the responsible FOREX trader and the average casino gambler.

Actually, the casino owner and the FOREX trader have much in common. They each find a handful of games with a small positive expectancy.  And then they play each game whenever possible.

The casino owner (or FOREX trader) knows that the outcome of single game (or trade) is unknown. However, the outcome of many games (or trades) will eventually meet its expectancy. In this case a positive expectancy.

The job of the casino owner is infinitely easier than that of the FOREX trader. In a casino, the odds are fixed, the number and quantity of variables are known.

In the FOREX market, the variables are constantly changing. And the reasons for the changes are not always clear. (I’d like to say that changes in the Market are at times senseless, but who am I to question the market? The market price is always correct.)

The only responsible way to trade the FOREX market is to exercise a trading strategy with a proven positive expectancy.

One of the best ways to implement a trading strategy and verify its profitability (or positive expectancy) is by using a mechanical trading system, like an Expert Advisor.  Also, an easy way to consistently execute a trading strategy is to run an Expert Advisor.

So, if a trader has a strategy with a positive expectancy and a platform to consistently execute the strategy, when does luck matter?

To the well funded trader: never.

To the under-capitalized trader: in the beginning.

Remember this  fact: the outcome of any one trade is unknown.

Actually, the outcome of a string of trades is somewhat unknown. For this reason, the starting-capital-challenged trader must pay close attention to the statistics of their trading system.  Especially the amount of the maximum loss and the number of consecutive losses. These statistics are used to determine the system’s maximum draw down.

The value of the system’s maximum draw down dictates the minimum starting account balance. To begin trading FOREX without knowing your maximum draw down, or to knowingly under fund your account based on the draw down, is well, trying to get lucky.

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