Something to read

The Five Laws Of Gold

This isn’t an article about gold prices — it’s about the five golden rules of money. The Five Laws of Gold are lessons on growing personal wealth. They are from my favorite book on the subject, The Richest Man in Babylon by George S. Clason, first published in 1926 and reprinted dozens of times. I’ve read it dozens of times. This book made such a big impression on me in my youth that I forced my children to read it when they were teens. Today, in their 20s and 30s, they have successful careers and are avid savers and investors.

Clason tells an enjoyable story that is filled with wisdom and practical advice. Set in the ancient city of Babylon on the eastern bank of the Euphrates River, the story focuses on the teachings of Arkad, the richest man in Babylon, and Bansir, a chariot builder who desires to improve his lot in life. The book includes stories of others who followed these principles, including slaves who were able to buy freedom and build their own empires.
The words are timeless because the laws of gold never change. The money we accumulate at one time belonged to someone else. We help and serve other people and earn proper payment for these acts. After receiving payments, it’s up to us to use the money wisely, and that’s where the Five Laws of Gold come in.

The first law covers the concept of a diligent savings plan and remaining laws explain how to prudently invest those savings. The last three laws are of particular interest to me as a financial adviser because they focus on who to trust for advice and who to avoid.

Here are The Five Laws of Gold, as Clason wrote them:

1. Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
2. Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
3. Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
4. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.
5. Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.

Buck Rises, Remains Wary Of NFP

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European Central Bank (ECB) President Mario Draghi’s pledge to maintain the ECB’s record low benchmark rate of 0.5% — and possibly push it below the current level — has given the EUR bears renewed confidence, euro-bonds a leg up, and equity markets a green light to proceed at full-speed ahead. With fixed-income dealers pricing in a more aggressive Federal Reserve tapering, the mighty dollar is in demand ahead of this morning’s headline event – nonfarm payrolls (NFP). However, buyers should beware as the outcome of this jobs report always has the potential to undo all of the good with one soft stroke.

Obviously today’s key event, the NFP report, will determine the direction of the buck and all the other asset classes. The stronger-than-expected U.S. data that’s been released over the past week has definitely raised market expectation to new heights for today’s labor release. The Fed has loudly acknowledged that they are heavily leaning on the labor market for guidance and each NFP release from here until the end of the year will be a contentious event.

Speculators, investors, and dealers alike will be looking at this morning’s print to be broadly supportive of a potential September taper in a matter of mere weeks. The fixed-income asset class will be the most active of classes if the market is surprised greatly in either direction by the employment headline.

An NFP print coming in close to consensus would remain supportive of the dollar. It could be the beginning of the next dollar bid higher against emerging markets and the G-10 alike. From what we have seen from the emerging markets space over the past number of weeks, investors should be expecting further weakness from TRY, INR, and MXN outright on a consensus or stronger headline from the labor report. As for the G-10, the game plan for many remains the same. Current market consensus continues to favor long USD/JPY and short EUR/USD positioning – interest differential trading.

The U.S. is not the only nation reporting on their domestic job situation this morning. Its strongest trading ally, Canada, is expecting a solid rebound from July’s negative employment headline print (-39k). The market consensus expects a +20k rebound in jobs and an unemployment rate to remain unchanged at +7.2%. With the new Bank of Canada (BoC) Governor Stephen Poloz delivering an extended neutral monetary policy stance this week during a BoC rate meeting, and when combined with the potential of Fed tapering, it does not support the CAD from an interest differential perspective. Currently, the market should be favoring selling the loonie on USD pullbacks. The CAD remains contained within its four-cent range of 1.03-1.07. It’s a monotonous range trading with little vulnerability for now.

Forget gold. Classic cars are the new hot investment.

For rich people seeking new places to put their money, maybe one more fun than mutual funds and less risky than tech startups, one asset class is beating out all the rest: Classic cars.

Real estate firm Knight Frank put out its Luxury Index on Friday, which tracks a basket of collectible items that serves as a good proxy for how good wealthy people are feeling about their situations in life. Known as the KFLII, it kept rising fairly steadily through the recession, and is now beating the global stock markets.

China stocks up on gold as price tumbles

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THEY'LL be clinking champagne glasses at the People's Bank of China after reading Goldman Sachs's latest gold forecast. The Chinese central bank will be looking forward eagerly to filling more of its vaults with the metal at bargain basement prices.

Jeffrey Currie, head of commodity research at Goldman, says the yellow one could fall below $US1000 an ounce and the bank's target average for 2014 is $US1050 an ounce.

Sure, it's been a bad week for gold. The seeming truce on the Syrian chemical weapons issue (no US airstrikes required) and anticipation that the Federal Open Market Committee, which meets tomorrow, will reduce the rate of money printing have induced a market feeling that all is well (no wealth protection required).

Gold lost 5.5 per cent last week (and has dropped 22 per cent since January 1) and came close to breaking through the $US1300/oz support level; silver was down 9 per cent on the week.

Gold won't look too flash this week, either, as fund managers expect Middle East tensions to ease and inflation fears to diminish.

But gold falling below $US1000 an ounce? There's only a one-word response to that: phooey!

However, the PBOC will welcome prices remaining about where they are or even drifting down into the high $US1200 zone. The falling gold price has certainly spurred Asian purchases.

The latest update from Thomson Reuters subsidiary London-based GFMS reports two fascinating numbers. One, the disinvestment by institutions and exchange-traded funds in the first six months totalled 456 tonnes, compared with the same period last year.

Two, Chinese gold-buying in the three months to June 30 was up 148 per cent year-on-year (and there were steep rises in Thai and Indonesian buying, too).

"Astounding" was the word GFMS used in relation to the Chinese purchases. Worrying, is the word we would use: Western investors will probably rue their selling decisions.

The GFMS report also shows that off-take in the form of jewellery, investment bars and coins rose more than 500 tonnes in the first half of 2013.

"The price fall triggered a huge leap in physical bar-hoarding and coin demand, while also marking a possible end to the decade-long substitution away from gold in the jewellery market," added GFMS.

In 2009, China reported its central bank holdings at 1054 tonnes. In 2010, a Chinese business newspaper quoted a senior official saying the country needed to build reserves to more than 7000 tonnes. Reports are appearing in Asian newspapers speculating that that level has already been reached. China will keep buying on the dips.

There is enough demand to ensure gold will not reach $US1000. Too many mines would go out of business.

Sure, we are seeing re-emergence of hedging, but so far it is very limited. If the miners thought gold was going anywhere near three figures, they'd all now be locking in forward sales.

Meanwhile, Beijing will be very happy with last week's correction. You can bet the house they'll be buying on weakness this week, too. And that will be another few tonnes closer to having a gold-backed yuan as the world's reserve currency.

Asian interests are not just buying refined bars, but investing in the production as well. We have seen Singapore's LionGold picking up projects and gold companies (some Australian ones included), and now Malaysian magnate Tan Boot Kiat is buying a 10 per cent slice of Atlantic Gold (ATV) and its plans to mine open-pit deposits in Nova Scotia.

His company, Avalon Ventures, already has 43.5 per cent of White Rock Minerals (WRM) and its Mount Carrington gold-silver project in NSW.

New hot spot

WHILE on the subject of gold, Warwick Grigor at Canaccord Genuity sees a new spot to watch: South America.

Grigor, like other investors, has been disappointed by the West Africa gold story, particularly the low rate of conversion from discovery to production. He doesn't think some of the seeming front-runners like Ampella Mining (AMX), Azumah Resources (AZM) and Gryphon Minerals (GRY) look likely to join the ranks of producers in the near future.

In South America, there has so far been limited success with gold (he excludes copper-gold projects). He is taking an interest in Crusader Resources (CAS), Orinoco Gold (OGC) and Cleveland Mining Co (CDG) -- all in Brazil.

Grigor poses a question: do countries like Colombia, Brazil, Guyana and others in northern South America have the potential to support a regional gold boom? They have the geology, but he worries about business practices, cultural issues and mining rules. After all, he notes, the market is looking for new stories to back.

Among those seemingly undeterred by such considerations are International Goldfields (IGS), which recently reported intersections including 3.38m at 13.8 grams/tonne gold in Brazil, while in Peru, Commissioners Gold (CGU) is gearing up production, Inca Minerals (ICG) has been drilling epithermal gold-silver targets and Wild Acre Metals (WAC) has just acquired the Colpayoc gold project 10km from Newmont Mining's Yanacocha mine. Condoto Platinum (CPD) last week announced a gold discovery in Colombia and Alicanto Minerals (AQI) now has two gold projects in Guyana.

Cool on Africa

FORGET Africa rivalling the Pilbara in iron ore. It's not going to happen, says London-based Ocean Equities. The majority of projects in Africa (including the vast Simandou resource in Guinea) will not be developed due to lack of bulk commodity infrastructure, including ports and railways, the analysts say.

Of the three iron ore juniors they like, only one is Australian. The nod goes to Equatorial Resources (EQX) and its Mayoko-Moussondji project in Republic of Congo. Ocean says its forecast operating costs at $US41.43 a tonne make it extremely competitive by international standards. It will also be able to use a railway line soon to be upgraded by another miner.

In a separate report, however, Ocean's analysts have also begun to follow another Aussie, Kogi Iron (KFE), which has its project in Nigeria. The analysts are impressed by the appointment as MD of Iggy Tan, the man who ran lithium producer Galaxy Resources (GXY) until this year.

While Kogi works on getting access to a railway, it has an alternative plan to build a slurry pipeline to the Niger River, with barges to take the iron ore to a port on the coast.

Nigeria is desperate to get mining projects going to reduce dependence on oil exports, so the government should be on side.

3 things the Fed might do and what it means for forex: HSBC

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Ah, September. Traders have been war-gaming the various scenarios for months. And on Wednesday, Federal Reserve policy makers will conclude their latest policy meeting and reveal whether they’re ready to start scaling back the bond purchases that are at the center of the extraordinary policy measure known as QE3.

Currency strategists Daragh Maher and David Bloom of HSBC have a handy note that looks at three possible outcomes for Wednesday’s big Fed announcement and how to trade each of them. Here they are:

No tapering: If the Fed fails to pull the trigger, “do not be fooled,” they warn. A decision to maintain the $85 billion-a-month pace of asset purchases would merely be delaying the inevitable, they said, while fostering heightened uncertainty and confusion.

In this scenario, sell any “misguided” emerging-market or risk-on rallies, they say. As for major currency pairs, sell dollar-yen USDJPY +0.17% and dollar-Swiss franc USDCHF -0.17% , since safe havens such as the Swissie and the yen are likely to be favored. In emerging markets, sell rallies in the Indonesian rupiah and Indian rupee, they said. While emerging-market currencies, which have been beaten down on fears of less Fed stimulus, might see an “announcement-effect rally” in this scenario, it would likely be short-lived.

Tapering: HSBC forecasts the Fed is likely to announce it will cut its monthly asset purchases by around $15 billion, slightly more than the median forecast of $10 billion. But they key question, the strategists say, is simply whether the Fed tapers or not.

The market is likely to play any tapering as a consensus outcome, they said, which would point to modest dollar weakness against the euro EURUSD +0.18% and the British pound GBPUSD +0.10% , which have already seen strong gains, while the yen and the Swissie would likely weaken a bit. In emerging markets, they would sell the dollar versus the Mexican peso USDMXN -0.03% because an “in line” outcome would possibly allow consolidation in some currencies to continue, “allowing for additional strength” in the likes of the peso and the South African rand USDZAR -0.05% , while still warranting caution on the rupee and rupiah.

Tapering plus new unemployment-rate threshold: This is what could really upend markets. In this scenario, the Fed tapers its monthly bond purchases but also says it won’t consider raising rates until the unemployment rate falls even lower than its current threshold of 6.5%.

“If the Fed can [successfully] drive U.S. rate expectations lower from current levels, this would provide a potent boost to ‘risk on’ and also foster a weaker USD. The biggest ‘bang for your buck”in this scenario would be to buy those [emerging-market] currencies which have suffered the most,” the HSBC analysts wrote.

In the G-10, such a scenario would favor buying the Australian dollar/Japanese yen pair and other yen crosses since safe havens “would suffer on the upbeat mood of ‘rates lower for longer,’” while the Aussie could outperform as the most liquid candidate for “this revitalized mood,” though the New Zealand dollar NZDUSD +0.84% would perform well, too.

Price of oil up again after Fed maintains stimulus and US oil supplies drop more than expected

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The price of oil rose Thursday after the U.S. Federal Reserve kept its monetary stimulus in place and U.S. oil supplies fell more than expected. Benchmark oil for October delivery was up 61 cents to $108.68 per barrel at midday Bangkok time in electronic trading on the New York Mercantile Exchange.

Prices spiked Wednesday after the Federal Reserve unexpectedly maintained its stimulus for the U.S. economy and the Energy Department reported a bigger than expected drop in supplies of crude oil and gasoline. The contract climbed $2.65, or 2.5 percent, to close at $108.07.

The Fed was widely expected to begin winding down its program of buying $85 billion a month in bonds and other assets. Instead, the central bank said it will maintain the pace of the bond purchases because it thinks the economy still needs the support.

Global stocks and commodities have surged as the new money generated by the unconventional program flowed through the financial system. Stocks rose sharply Wednesday following the Fed's announcement. The Standard & Poor's 500 and the Dow Jones industrial average jumped to all-time highs.
Both the U.S. Energy Department and the American Petroleum Institute said supplies of crude oil fell for the week ending Sept. 13.

The Energy Department said supplies by 4.4 million barrels last week, almost three times more than analysts expected, to 355.6 million barrels. The API said supplies fell by 298,000 barrels to 359.2 million barrels.
Brent crude, the benchmark for international crudes used by many U.S. refineries, was up 29 cents to $110.89 a barrel on the ICE Futures exchange in London.

In other energy futures trading in New York:
— Wholesale gasoline rose 0.1 cent to $2.728 per gallon.
— Natural gas rose 2.2 cents to $3.735 per 1,000 cubic feet.
— Heating oil rose 0.9 cent to $3.05 per gallon.

Why wait? – Analyzing the Power of Patience

Have you ever found yourself making statements like,

“I’ve got to make some money today.”
“I’ve got to get in this trade.”
“I’ve got to make a move.”
“I need to find some action.”

Is any of this sounding familiar?

For a lot of traders the urge to ‘get in the game’ can be overwhelming. An even more powerful urge can be watching a trade you are in go sideways and wanting to DO something about it. For minutes, hours even days you must sit and wait for the market to either move in your favor, or worse, against you. During such times a traders internal dialoged can be going crazy as he or she struggles with what to do.

You see, we must DO something right? If we’re just sitting at our computer and nothing is happening we must be doing something wrong….right? If there is no action in our trade that means we’re missing the action somewhere else doesn’t it?

Many, many traders get involved in FOREX with dreams of quitting their job, working from home and possibly making more money than they ever thought possible. We can encapsulate all of these ambitions into one simple desire, freedom. Freedom from a job that require us to keep regular hours. Freedom from a boss who tells us what to do and how to do it. Freedom from the fear of losing that job and having nothing. And most of all, freedom from financial stress.

The idea of ‘calling your own shots’ and ‘making your own rules’ is enticing to most traders. We are free thinkers, tend to be fairly risk tolerant, and tend to view money as a tool rather than a commodity. That’s why it might be strange to learn that these same traits can be extremely detrimental to your account balance.

You see, trading (when done correctly) can be quite boring. Sure working in the pits on an exchange or on a high risk trading floor can be exhilarating, but there is nothing exciting about watching your trade move sideways for minutes, hours or days. It takes a great deal of discipline to trade your system day in and day out. Trading requires you to be unemotional. Nothing kills an account quicker than an ego.

But these traits fly in direct opposition to our stated goal….freedom. When we fix ourselves to a set of rules and conditions we MUST follow, we are no longer free. Discretion (read ego) must be set aside. How many of you have purchased a trading system or EA only to second guess it at every turn? The desire to add your own bit of ‘human element’ (read ego) undoubtedly led to loss after loss. Maybe the system was junk to begin with, but how could you really know?

Another heavy contributor to our desire to trade comes from this concept of “time for dollars”. For many of you, trading is not your first carrier. It certainly wasn’t mine. Some of you have spent 10, 15 even 20 years in a carrier before moving into trading. For a large chunk of your adult life you equated ‘hours worked’ to ‘dollars paid’. The overwhelming desire to trade often comes from that unreasonable expectation that we must DO something in order to EARN our paycheck. We MUST trade. Because if we simply sit in our chair and watch the market without trading we have not EARED any money.

Traders, we are not in the ‘got to make money’ business. Our compensation is not determined by how many trades we take, or how long we spend in front of the computer screen. We are PAID (if you must use that term) for our discipline and sound decision making. This means that some weeks we’ll make nothing. On occasion we will lose money. But over time we are profitable because we have a plan we know works and we have the discipline to follow it.

People who have run businesses have an easier time understanding this than those that have not. You see, when you run a business there are days, weeks, even months when you won’t make one penny. You may spend 18 hours a day trying to build that business into something great only to see those efforts lost in the result. If we stop thinking in terms of Hours Worked = Dollars Paid we can shift our focus and our expectations from one of, “I have to trade.” To something more profitable like, “I have got to stay disciplined.”

Ask yourself a simple question today. Do I have an urge to trade because of some unreasonable expectation I have been putting on myself? If the answer is yes there are some simple things you can do to refocus your goals and change your beliefs. You have already begun to ask yourself more empowering questions, so you are one step closer to discovering more empowering answers.

Most traders spend countless hours looking for that magical combination of indicators that will reveal the “holy grail” of trading strategies. Obviously, the goal is to find a winning strategy, but more oftentimes than not "winning" is misconstrued into trying to find a strategy that wins a high percentage of trades. After all, winning a trade means making money, and losing a trade means losing money, right? Don't be so sure about that.

Like many of the seemingly obvious components that go into creating a great trading plan and becoming a great trader, what we think seems logical in reality is what is holding us back.

Along with other ways to think in terms of probabilities, the following is an example of something I deeply believe needs to be not just simply understood, but ingrained into the subconscious of our trading psyche (if through nothing more than repetition) in order to ultimately eliminate emotions for every single trade we place. This may perhaps be the most difficult aspect of becoming a true professional trader, but a trait that one simply must have to stand any chance of survival—both financially, and psychologically.

Being a profitable trader is not just about winning percentages. In other words, you can earn positive returns without winning most, or even a majority, of your trades! It’s all about risk vs. reward. If your strategy allows you to identify trading opportunities that offer more reward than risk, then even a 50% winning ratio could yield a significantly positive return over time.

For example, let’s assume a $10,000 trading account where 10 trades are placed, and $100 (1%) is put at risk for each trade…

If risk-to-reward is 1-to-1, then a 50% win ratio will result in a “break-even” return…

[10 trades placed] x [50% losers] = [5 losses] x [$100] = [$500 loss]

[10 trades placed] x [50% winners] = [5 wins] x [$100] = [$500 profit]

[$500 profit] – [$500 loss] = [$0]

If risk-to-reward is 1-to-1.5, then the same 50% win ratio will result in a positive return…

[10 trades placed] x [50% losers] = [5 losses] x [$100] = [$500 loss]

[10 trades placed] x [50% winners] = [5 wins] x [$150] = [$750 profit]

[$750 profit) – [$500 loss] = [$250 profit]

In terms of percentage return, this second (profitable) example would result in a 2.5% return based on the starting account balance (total equity) of $10,000 after just 10 trades. This, of course, is the case when just 1% of total equity is put at risk. If 3% ($300) is put at risk (a rather high amount to most veteran traders), then this same example (same track record) would yield a 7.5% return. . In other words, greater profits are achieved based on the exact same performance…

[10 trades placed] x [50% losers] = [5 losses x $300] = [$1,500 loss]

[10 trades placed] x [50% winners] = [5 wins x $450] = [$2,250 profit]

[$2,250 profit] - [$1,500 loss] = [$750 profit]

Conversely, a high winning percentage (which typically necessitates a bigger margin for error, or greater risk) may actually result in smaller, less profitable returns over time. This occurs when the average risk is higher than the average reward. For example, using the same hypothetical $10,000 account that’s risking 3% ($300) let’s assume an 80% win ratio with an average risk-to-reward ratio of 2-to-1…

[10 trades placed] x [20% losers] = [2 losses x $300] = [$600 loss]

[10 trades placed] x [80% winners] = [8 wins x $150] = [$1,200 profit]

[$1,200 profit) – [$600 loss] = [$600 profit]

So the trader that boasts an 80% win ratio may actually be less profitable than the trader with a seemingly unimpressive 50% win ratio. So the question is…do you want to be right, or do you want to make money? Believe it or not, even negative returns are possible with a higher winning percentage when risk far outweighs reward, so make sure to factor this in when performing due diligence in assessing a strategy and/or track records results.

“10 Dimes Make a Dollar”

Hopefully, this demonstrates the importance of assessing risk/reward in addition to winning percentage when trying to determine the actual success, or profitability, of a trading strategy/track record. Remember, trading success not just about winning and losing individual trades—it’s about sustaining profitability over time (making money and holding onto those profits in the long run). The most common mistake newer traders make is in determining the success of a trading strategy (i.e. track record) based on winning percentage alone, which can be quite misleading when risk/reward is not taken into account. Most newer traders (unknowingly in most cases) are willing to risk far more than they are looking to gain (reward) just to be “right,” or win, each trade.

Another good piece of advice is to always keep in mind that trading is all about making profits over time , not about trading ego (which is usually the result of focusing just on winning percentages). In other words, significant returns can be achieved when you allow yourself to look at the big picture. As the saying goes, “10 dimes make a dollar.” The key is to be able to determine both entries and exits in advance so that risk vs. reward can be determined. This will significantly help to keep the decision making process as consistent and mechanical as possible, which is essential regardless of the technical/fundamental strategy that is used as it helps to eliminate emotions when making trading decisions. Only then can a truly objective decision be made as to whether or not to take the trade since this decision will be based on established/actual results, and not a “gut” feeling or reaction. Understanding the mathematical “law of averages” and “law of large numbers” reinforce this mechanical approach to trading which, again, is crucial to trading success because mixing emotions with money-based decisions is usually a recipe for disaster!

GOLDMAN: The Stage Is Set For A Gold Rally


Goldman Sachs precious metals analysts Damien Courvalin and Jeffrey Currie are out with an update on gold prices following the Federal Reserve's surprise decision to refrain from announcing a tapering of quantitative easing yesterday, which sent gold soaring.

Courvalin and Currie are bearish on the metal, but say the rally could have further to run this year:


Near-term upside on delayed taper but still bearish into 2014


The FOMC unexpectedly decided not to taper the rate of its asset purchases, preferring to wait for further confirmation of improvement in the US economic outlook. This announcement, as well as Bernanke’s press conference, was more dovish than most had expected, pushing gold prices to $1,365/toz. The decision, combined with the upcoming debt ceiling debate, leaves risks to gold prices as skewed to the upside in the near- term, in our view.


However, with gold prices already back near their pre-June FOMC level, COMEX net speculative positioning
already back at its April level as well as growing pressures on EM gold demand, we believe that this upside will ultimately prove limited (see Neutral gold prices near- term but still expecting new lows in 2014, September 17, 2013). We believe this is well illustrated by today’s more muted rally in gold prices when compared to the significant rally in 10-year TIPS yields, helping close the significant valuation gap that had occurred between both assets over the past month.


As a result, we re-iterate our neutral stance on gold prices and continue to expect that gold prices will resume their decline heading into 2014 when we expect economic data to solidly confirm a reacceleration in US growth and warrant a less accommodative monetary policy stance.


Gold is up 4.6% today in the wake of the Fed's decision, trading at $1367 an ounce.

Gold and silver bars are pictured in front of a safe door at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011.

I often hear beginning traders speak as if they know what the markets will do next. In reality, experienced traders usually speak in probabilities and typically have some form of analysis to back up their opinion. No one can say that a particular currency pair (or other financial instrument) will move to an exact point with absolute certainty. In fact, I feel it is naive to think that anyone can predict the direction of a currency pair with absolute certainty over a given period of time. Sure, sometimes you could be correct if you boldly predict that a pair will move to X level with absolute certainty. However, there will be other times when the market doesn't go your way. That is why we must deal with probabilities, because no one knows for sure what will happen next in a given currency pair.

The reason we can never know where a currency pair with absolutely certainty is that the markets move based on the will of every market participant. Let's suppose that someone stated "the EUR/USD will definitely rise to point X, before falling down to point Y". They are saying that know exactly what every market participant (or trader) is thinking, how each of these participants plans to act, and how each participant will respond to the actions of every other participant. Needless to say, no one could ever have that information.

However, it isn't uncommon to see bold predictions that definitively state which direction a currency will pair and exactly where the move will begin and end. No one can know these types of moves for certain. Even worse, it isn't hard to find predictions that say something like "buy the USD/JPY at X or you'll be sorry." This baseless claim gives virtually no useful information because we don't have any idea how long of a trade this would be or where the exits (stop and limit(s)) are. Without being too harsh, just beware of anyone who claims they know for certain where a currency pair is headed. Of course everyone can be entitled to their opinion, but that doesn't mean they "know" what will happen next.

Even if an insider were to know about an interest rate change ahead of its release, that doesn't mean they can predict exactly how the market can act. What if the interest rate briefly rises the pair into massive stop-sell orders that actually moves the market down for the day? What if enough market participants felt the rate would move higher, so the pair moves lower? There are endless scenarios, but it is virtually impossible to predict how every market participant will act within a constantly changing market.

Therefore, we must think in probabilities. No matter how sensational your analysis is, sometimes you will simply be on the wrong side of the market. Whether you are looking at fundamental news announcements, a combination of of technical tools, or a simple moving average, what traders are looking for are patterns that put the probabilities in their favor so they will profit in the long run. In other words, they are looking for how the market has reacted in the past to certain conditions, and speculating how likely the market will react in the future to similar conditions.

Regardless of the tools you use to analyze the market, you are still working with probabilities. If you find a system that is profitable over a long period of time, that system is likely putting the probabilities on your side. These systems come in a variety of shapes and sizes. Some traders (like the famous Turtles), lost far more trades than they won. However, when they won, they usually won big. Some traders try to win the vast majority of their trades while risking a lot, but gaining little. Of course there are all sorts of variations and methods besides those two examples.

We will use the profit target system I use on FX360.com for the purpose of providing an example with easy math. This system requires 40% of trades to reach the profit target in order to break even. The reason for this is because the risk:reward ratio is generally 1:1.5. Therefore, if I win only 50% of my trades, I would be extremely profitable over time. Even winning 45% of my trades would lead to great returns. Anything above 50% wins would be outstanding. Therefore, it is plain to see that it is not necessary to know where the market will go on each individual trade. Instead, it is important to have a system that puts the odds in your favor over a large sample size of trades.

Based on these simple statistics, it is pretty easy to see why it makes little sense to get very excited when a trade wins or very upset when a trade loses. As long as the probabilities continue to hold over a long period of time, the individual results for each trade are almost meaningless. I lose trades all the time and so does every other trader. The key is to manage those losses correctly so that the long term track record is profitable. The bottom line is that thinking of trading in terms of probabilities is a key step to becoming a successful trader.