You must’ve heard someone saying that winning a trade is like tossing a coin and getting the right side. I’ve heard it many times as well. The way this is explained is that the market only has 2 sides, just like the two sides of a coin: it can either go up or down. So the chances of you winning are 50/50. If you have a strategy with an edge, you can increase these chances to about 80% or 90%. This logic is overly simplistic and in fact very misleading. If it were so simple, over 95% of the people would not be losing money in forex trading. The reality is much more complex than that.
First of all, this ‘theory’ doesn’t pay any regard to the extent of winnings; even a trade with a $1 profit is a winner and a trade with a $1000 loss is a loser. Imagine how many winners you need in this case to cover up for the losers and break even!
The second fact is that the market doesn’t simply move either up or down in a straight line to end up on ‘either side of a coin’; it fluctuates incessantly in a pattern that appears very random and translates into some directional sense on each of the different time frames. The market can appear to be trending upwards on the 10 minute chart, downwards on the 1 hour chart and still upwards on the daily chart. How you decide whether the market is going up or down at each point in time depends on your perspective of looking at the chart, your time frame, emotional impulses or what you simply ‘feel’ about the direction of the market, (which can again a function of whether you bought or sold), any ‘external influences’ such as your friend or your broker convincing you of other possibilities as well as many other things. The direction of the market fluctuates can change with every pip, with every one of your heart beat, and regardless what your moods and where you want the market to go, or feel the market should be going.
Take an example. A group of traders are issued a trade call to “ sell euro at 1.0834 with a stop loss at 1.10734 and a take profit of 1.10934”, and the trade gets fulfilled in 1 days’ time. I’m assuming a 1:1 Risk/Reward ratio (the stop loss and the take profit levels have the same distance from the entry point) to try and simulate the 50/50 coin outcome situation to some extent. We assume that this trade call is taken seriously by all the people in our sample; they all smell and feel that this will really work, and believing in the positive outcome of this trade , all decide to execute this trade call exactly the way it’s been told.
Let’s suppose that this trade was a winner, that the market did indeed go in the right direction and touch the take profit level in a few hours’ time. Do you think that the trade will have a similar outcome for all the traders? Not at all.
Sam put 30% of his trading account to risk because he felt extremely confident about the broker’s trade call. After all, the broker had been right twice before. When Sam suddenly saw prices surge to below the entry level and looked at the amount of loss he had made so quickly, he closed the trade right there, for fear of losing more. Bob, who never believed in putting a stop loss because he thought the stop losses are bound to be hit, closed his trade right after he saw the first few profit figures. Tom one who saw prices retracing again right below the take profit level, called his friend Harry, another trader, to ask him his opinion. Harry prompted him “I don’t see the market going up from here. Don’t leave the rest of your money on the table!” In the end, Tom ends up closing the trade with much less profit than what he could’ve made by holding it till the take profit level. There are so many possibilities, and I can go on and on, but it would take too much space than we can possibly imagine.
What will be the outcome of each trader who has ‘ followed’ this trade call will be very different, depending on how they chose to react to the running trade at different profit and loss figures. The outcomes will vary depending on chart reading and risk management skills, which is in turn fundamentally dependent on the internal emotional ecology of each trader, and how they dealt with it when they faced different situations during the running trade. The figure under ‘profit/loss’ would have fluctuated from a negative to a positive figure and then back to negative, from negative to positive and then more positive, generating emotions that translated into some closing the trade with losses, some around break-even and some with profits.
The outcome of a trade, whether it’s a winner, or a loser, and the extent the extent of the winnings and the losses are entirely dependent upon the reaction of the trader to the ever-changing market conditions, which are in turn dependent upon the complex whirl of emotional reflexes and their interaction with the rational part of the brain, that translate into clicks of entry and exit at various points in time. These outcomes are completely independent of the direction of the market and cannot be quantified or expressed mathematically.
The distinguishing ability of the real successful trader is that he or she understands and harnesses their emotions so that logical reasons and trading discipline prevails over emotions, and creates the best possible outcomes.
The sides of the coin are infinite. It is you who can to learn to choose the best possible side for yourself.