Forex Patterns and Probabilities: Trading Strategies for Trending and Range-Bound Markets

CHAPTER 18

The Forex Playing Field

If you watch and understand American football, you know the subtleties of the sport. You understand the importance of intelligent play calling, the deception of a disguised blitz, and the unique role of special teams players.

If you don’t understand, you are watching a lot of big men running around and crashing into each other.

If you watch and understand auto racing, you know about fuel mileage strategy, the aerodynamics of “drafting” at 200 miles per hour, and the effect of an extra quarter pound of air pressure in the right rear tire.

If you don’t understand, you are watching a lot of cars running around in a circle.

If you understand the dynamics of the forex playing field, you understand the ability to calculate odds, the consequences of short-term trading, and the importance of interest rate differentials.

If you don’t understand, you are playing with fire.

EVENING THE ODDS

Trading can be difficult, and in an effort to make it easier, some traders resort to taking very quick exits. “It’s hard to earn 100 pips,” goes the rationale, “I’ll just try to make 10 pips on each trade.” It seems to make sense; surely, it is easier to earn 10 pips than it is to earn 50 or 100 pips. The trader seeks to win by playing it safe, which would seem to be a commendable trait in the trading world.

What if I told you that instead of making things easier, this trader is in fact making his life more difficult? In order to understand why, we need to delve a ...