In order to be successful, forex traders need to know the basic mathematics of probability. After all, it’s difficult to achieve and maintain trading gains without first having the forex mastery 2 0 to understand the numbers and measure them.
Many traders use a combination of black box indicators to develop and implement trading rules. Probability and statistics are the key to developing, testing and profiting from forex trading. By knowing a few probability tools, it’s easier for traders to set trading goals in mathematical terms, create and operate effective trading strategies, and assess results. It’s helpful to review the most basic concepts of probability and statistics for forex trading. This is the sort of distribution that would result from artificially spreading objects as evenly as possible across an area, with a uniform amount of spacing between them. However, instead of a uniform distribution, a currency-pair’s price will likely be found within a certain area at any given time. Normal distribution offers forex traders predictive power regarding the likelihood that a currency-pair price will reach a certain level during a certain time frame.
If a large number of sample prices are checked, the normal distribution will form the shape of a bell curve when plotted graphically. The greater the number of samples, the smoother the curve will be. The rules of simple averages are helpful to traders, yet the rules of normal distribution offer more useful predictive power. Yet, the normal distribution can also tell the trader the likelihood that a certain daily price move will fall between 30 and 50 pips, or between 50 and 70 pips.
Yet, traders should be cautious when using the concept of normal distribution alone for purposes of risk management. So, for testing a forex-trading strategy by estimating the results from sample trades, the system developer must analyze at least 30 trades in order to reach statistically-reliable conclusions regarding the parameters being tested. Likewise, the results from a study of 500 trades are more reliable than those from an analysis of only 50 trades. Mathematical expectation for a series of trades is easy to calculate: Just add up all the trade results and divide that amount by the number of trades. If the trading system is profitable, then the mathematical expectation is positive.