In forex trading, as far as predicting price goes, nothing is a certainty and anyone claiming otherwise has never traded the markets or is selling a pot of gold at the end of a rainbow. Predicting price direction is based on probabilities. Either the price has a higher probability of going in your favor or it does not. Identifying the areas on a chart that offers the highest probability for a successful trade is the skill. As traders, our goal is not to believe we can forecast the next layer of irrational reaction to future news we cannot predict, but it is to develop a system (technical, sentiment, or fundamental driven) that can increase the probability of our success.

Trading is a probability game and the more you understand ratios, percentages, numerical sequences, etc. the easier time you will have to track the movement of price in your charts and your analysis will be more accurate. You do not need to have a doctorate degree in mathematics, computer science or quantitative analysis to be a profitable retail trader. But understanding finite mathematics, game theory, statistics, and probability will help you analyze charts and develop a trading system without constantly making order entry errors, analysis errors, etc.

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Real markets are wild and if you trade with real money, you already know this. And if you attempt to overlay cause and effect on price action, you know this. So, does this mean we should be defeatist and believe we can never win? Absolutely not! If you attack the market with the mindset that it is a probability game–interspersed with wild and unpredictable movements–that already can give you a substantial leg up on the crowd. The natural benefit of thinking in probabilities is the acceptance you cannot predict with any degree of certainty. This doesn’t mean you don’t forecast. It means when you do it, you know ahead of time how much the right to forecast will cost, i.e. your stop-loss level.

Many traders use a combination of black box indicators to develop and implement trading rules. Yet, the difference between a “good” trader and a great one is his or her understanding of the metrics and methods for calculating performance and gains. Probability and statistics are the keys to developing, testing and profiting from forex trading. By knowing a few probability tools, it is easier for traders to set trading goals in mathematical terms, create and operate effective trading strategies, and assess results. It is helpful to review the most basic concepts of probability and statistics for forex trading. By understanding the math of probability, you’ll know the logic used by mechanical trading systems and expert advisors (EA).

Although beginning traders hang their entire psychology, confidence, and performance on the next trade – you have to look at the next one as just one free throw in the thousands you will make over time. Professional traders are not worried about the next trade winning or losing. What they care about is making money long term and over time. They want to maximize their profits by playing the mathematics – by thinking in probabilities. Your edge, applied with consistency, should allow you to inch the probabilities of a winning trade slightly in your favor; this alone is what will allow you to win over time. And keep in mind, this trading game, in reality, is a marathon, whereby you remain open to learn more and more along the way and finish the race stronger than when you started.