Fallacy is when a belief or an idea is mistaken with incorrect reasoning. When referring to Forex trading, the Trader’s Fallacy is when a trader mistakenly insists that the likelihood of a certain event is definite. A trader could be basing their forex trading on a recent market trend and single performance of a currency pair while be mistakenly convinced that the trend will favour their considered trade position.
For example, a person under the gambler’s fallacy may feel convinced and guarantee that a fair coin that has been turning heads up after 20 turns has the probability of turning tails up on the next coin flip. This is a misconception because every coin flip holds an independent event and the past flips cannot change the probability of the future flips. Whether the coin will land heads or tails each has a 50% probability. Similarly, a trader may believe that a position can be liquidated (due to the fact that it has risen after continuous trading sessions) since he is not convicted that the position is probable to rising no longer. A trader’s fallacy can be referred to as the ‘Monte Carlo fallacy’ or the ‘gambler’s fallacy’, the Trader’s fallacy can be fatal for any Forex trader.
Although it is often incredibly tempting for most traders, the Trader’s fallacy is an easy and treacherous way of going terribly wrong in the Forex market. It is a common feeling for traders to feel that absolute conviction that a certain random situation is bound to change or happen again. By continuing to bet like this, the trader will be guaranteed a loss of money overtime which can be devastating to a trader’s account balance and overall profitability.
Forex traders always determine if a trade(s) is likely to make profit or not. This is known as the technical term – Expectancy.
There are 2 types of expectancy:
Positive expectancy is when traders believe that averagely and eventually over many trades (for any type of Forex trading system); they will make more money than they will lose.
Negative expectancy can be caused when depending on previous events of a trading situation, a trader can feel convinced that he can take advantage of the ‘odds’ happening thereafter. This has on many instances lead to a countless number of forex traders making a huge loss (The Trader’s Ruin).
The Trader’s Ruin works in the way that the party with the most capital will most probably accumulate all the funds – that party in Forex is the actual Forex market. The Forex market as a whole is comprised of a boundless bankroll and there is a conviction that eventually, the market will seize all the trader’s funds even when a trader seems to have amazing odds in their favour.
However, there are ways of protecting a trader’s account from the misfortunes of the Trader’s Ruin.
In order for traders to avoid damaging and negative forex trading encounters and the Trader’s Ruin, it is best for them to trade in situations where their probabilities could turn out profitable where they understand what trading actions and techniques can be used. Having some sort of idea about the trading and consequences of your trades will go a long way to turning your negative trading experience into a profitable experience.
Avoid the Traders Fallacy and Ruin…
A way of avoiding the temptation of the Trader’s Fallacy and the disastrous drawbacks of the Trader’s Ruin is to implement a mechanical Forex trading system. This software can assure a trader ways and methods of obtaining positive trading results. It also has the ability to prevent traders from dilemmas and frustration during their trading activities as it includes mechanized Forex trading rules and regulations.
This trading software compromised with Forex currency trading systems and trading signals, enables a trader to feel more controlled, secure and discipline during his trading decisions and actions. Forex trading is made simpler by using Forex demo accounts online, use a demo account to try out your Forex trading system and perfect it. Forex reviews and accounts of different Forex trading systems are provided on the internet. Amateur traders as well as experienced traders are suggested different ways of trading online, and will give them much needed advice on what systems to use.
Forex demo accounts are rather useful as a trader can accustom and feel comfortable with a new type of trading system before risking their actual money. There is also help available through these demo accounts about controlling your chosen forex trading system. Since the internet offers traders different types of Forex trading system demos, the trader will be able to decide on his most suited system. As well as this, there are many ways offered to help find the best broker scattered all over the internet.
Market charts and patterns are a great tool for traders. Traders can analyse a variety of different charts and patterns in order to predict future currency and market movements. Most brokers implement Forex trading systems that support charts, patterns and indicators in order for traders to carry this analysis out. Recognizable to many active traders, there is a range of numerous common patterns used in the Forex market that aid a trader to predict these various market fluctuations. Familiar chart pattern names to a candlestick indicator are ‘flag’, ‘hanging man’ or ‘gap’. Monitoring these different chart patterns overtime can have an advantage as traders may predict likely directions in the market. This analysis can even lead a trader to calculate a value change in the Forex market, if you want to get more technical about it that is. Using a mathematical technical study that aims to foretell market movements involves dedicated hours and plenty of dollars. In the end though you will be able to predict and roughly know how much profit a certain trade can bring you.
A trader can gain profit during his trading activities or terribly lose profit and funds by simply falling for the Trader’s Fallacy.
A trader may come across a ‘bull flag’ pattern for instance where 8 out of 10 times it has an upward movement in the market. The trader has the option of going long in this trade and can be assured a profit, 80% of the time. Through this Forex trading signal, the trader can now determine his expectancy. The trader can ensure that he gains the top most amount of profit. To succeed in this, he must abide by this trading system’s policies and determine a secure trade and account size as well as a stop loss value that will guarantee his trade to end up with positive expectancy rather than a negative one.
Sometimes however, an ideal trading system that appeared to be working well may one day fail and land a trader excessive losses in his trade. He may be following rules and keeping up a good system but being suddenly stopped from a trade can be devastating for any trader, especially one that had a certainty of gaining a lot of profit. Referring to the above example, it is not definite that the trader will win 8 times out of every 10 trades. He could even suffer a loss for 10 or more successive trades. After these losses, the trader could receive another Forex trading signal.
The trader could fall for the Trader’s Fallacy. Because of the several consecutive losses in his trade, the trader may feel that a win is bound to happen in his next trade. The trader may even place a larger trade risking more losses but believing he may win in the next round. This is a misconception due to the fact that the trader will continue to trade convincing himself that there may be luck and gain himself a sudden surprise of profit. This is wrong because he will instead land himself a repeated failure of greater losses as his expected turnover of the situation did not happen.
Finally, in order for the trader to prevent himself from falling for the Trader’s Fallacy, he must build more discipline and bring this persistence to an end. Instead of risking a larger trade when noticing consecutive losses, the trader should rather place a normal trade and if unfortunately he suffers from loss again, it is advised that he quit the existing trade. He can also renounce this trade pattern but continue to analyse the different chart patterns for a while and anticipate any movements that prove to achieve positive expectancy. A trader who follows these trading strategies will be prevented from the Trader’s Ruin and will instead gain huge amounts of profit for his Forex account.