Trading the Odds for Profit
While you are not trading certainties but that doesn’t mean you can’t make a lot of money, you can - by trading the odds.
With a sound trading method that runs profits and cuts losses quickly you can build significant long term wealth.
It is no coincidence that many of the world’s top traders started out as either blackjack or poker players. The reason for this is - any good card player knows he won’t win every hand but if they bet when the odds are in their favor and fold when there not, they will make a lot of money longer term.
Trading is simply an odds game.
If you know how to calculate the odds correctly, you can win and build significant long term wealth. Let’s look at how to get the odds in your favor.
Price Movement – The fundamentals
Many traders like to trade off news stories and watch the fundamentals, it’s popular but will trading news stories make traders money? Let’s find out.
A currency trader, who makes trades based upon fundamental analysis, will look at the supply and demand situation relevant to the particular currency studied, and try and predict the impact of such factors as:
* The health of the economy
* Economic policy
* Interest rates
* Balance of payments
* Employment
* Trade deficit
* Political factors
And many more.
On the face of it fundamental analysis provides a logical and rational basis for investment decisions however there are problems in applying it and traders who try and trade off the news generally lose.
The main problems are:
1. Markets Discounts
We live in a world of instant communications where traders can and do get the news in a split second - the fundamentals are instantly discounted and the market is looking to the future.
By the time you have seen, studied and acted on the news - it’s already been discounted.
2. Investor Psychology
Another major problem is that the fundamentals are there for all to see but individual traders all reach different conclusions based upon what they have seen furthermore, humans are not logical beings!
Prices reflect the fundamentals but they also reflect the emotions of the participants and investor psychology is THE major influence on price.
The equation for market movement is simple:
Fundamentals (supply and demand facts) + Human Perception (investor psychology) = Market Price
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