• Follow TraderRach on Linkedin
  • Like me on Facebook
  • Follow me on Twitter
  • Watch me on YouTube
  • Follow me on Pinterest

Lesson #9: Forex Trading Probability In Action Can Fool Smart Traders

With forex trading we can do all the clever testing in the world, but how do we know what our forex trading systems will do in the future?

We don’t know for sure!

Testing and past experience helps prepare us for the likely outcomes, but it’s no guarantee of future performance.

When I first started trading I set off on a back testing mission.  It felt like I got stuck in that phase for some time.  There was always another test to run, idea to try or something to keep me from moving on.  But eventually I did move on.

Now, if I could say so myself, I was very good at back testing even though I was a beginner at the time, I had everything taken care of.  I knew how to test even complex trading system ideas, create scenarios that replicated real trading as much as possible and had all the knowledge I seemed to need.  Or so it seemed.

Reality can be great and it can be brutal too.  There’s no telling what will be served up to you.

Learning Forex Trading Reality

The forex trading lessons I learnt were:

  1. The past is not the future.
  2. Each forex trade is unique and not representative of the forex trading system outcome.
  3. Increasing the number of forex trades for systems with a profitable edge, increases the likelihood that the equity outcomes will be in a positive position at that point, compared with the start.
Can you spot these lessons in the charts below?

Simulation For Forex System Understanding

I’ve created my own TraderRach Trading System Simulator that helps me understand and visualise the possible outcomes from different forex trading system parameters.  It replicates the probability scenarios of forex trading systems.  Stay tuned and I’ll let you know how you can get your hands on the TraderRach Trading System Simulator.

Here are some graphical examples from the TraderRach Trading System Simulator:

    • System 1 has a low win rate, high sized average winning forex trade compared to average losing trade.
    • System 2 has a high win rate, fairly neutral sized average winning forex trade compared to average losing trade.
    • There’s also a display of the combined results.
It’s important to note that each of the charts below represent the same forex trading systems and the possible outcomes of those exact same systems based on their key performance metrics.
The x-axis is the trade number; the y-axis is the cumulative results of risk-multiples like an equity curve of risk-multiples (the same as if you traded the same amount for every trade without applying a money management strategy, where 1 was the amount you risked for each trade).

TraderRach Trading System Simulator - Excellent results

Figure 1: Forex trading systems both performing. No worries.

If our forex trading outcomes look like this chart there’s likely to be no time of real concern.  There’s an ebb and flow in the equity curve but nothing alarming.  Both systems achieve much the same.

TraderRach Trading System Simulator - Want to Quit

Figure 2: For the first 100 forex trades you’d think you were off course. This may send you back to the drawing board.

Would you know to stick to your guns and trade on in these circumstances when you’re going nowhere for the first 100-odd trades?

TraderRach Trading System Simulator - Slow to Grow

Figure 3: It’s like watching the grass grow, then boom!

Under this forex trading scenario you’d wonder if you were ever going to head anywhere.  Would you have hung around for the rewards?

TraderRach Trading System Simulator - Flip Flop

Figure 4: Flip flop forex trading system contributions.

Would you be tempted to cut the cord to System 2 as a lost cause after 100 trades, only to later find you’ve turned your back on the top performer?

TraderRach Trading System Simulator - Slippery Slide

Figure 5: A forex trading system that sucks and a slippery slide to boot!

Not only do you have a system that soaks up your time for nothing, you have a cliff like moment that looks never ending.  Would you react and if so, how?

Will Forex Trading Probability In Action Lead You Astray?

Can you believe that the differences between the charts are probability in action?  The fact that there are some great results amongst them show that the systems are sound, but could you have been tricked?

Nothing is certain, but by the time we have 250 forex trades for each trading system, all scenarios have a profitable combined system outcome.  The degree to which they do can be significantly different.

Do you understand the impact of probability for your forex trading system(s) enough to know when to stay on course?

***The probability effect is the same for other types of trading, not just forex trading.

More Resources

How To Design A Trading System Using Technical Analysis

How To Send Doubt Packing From Your Forex Trading This includes access to the TraderRach Doubtmeter – test yourself!

About Rachel Hunter TraderRachAbout the Author: I’m Rachel Hunter, TraderRach, a Forex Trader who helps traders achieve the life they love with forex.  Be strategic and design your trading business for sustainable success and have fun!  That’s my mission.  Join many traders’ gaining the edge with “10 Powerful Lessons for Forex Trading Success” plus other goodies.  Years of precious learning specially packaged up for you.  My background before trading is as a Chartered Accountant and Chief Financial Officer.   I know what it takes to make a trading business rock on.  It would give me great pleasure to make a difference to your success.

Click here for the TraderRach Newsletter Sign Up Form

Get More Lessons and the Trader Toolkit

Already coming to current subscribers