The Probability Versus Potential of Record SPX Highs, NFPs Surprise, EURUSD Parity
• There is a difference between potential and probability - it is evaluation of risk/reward versus likelihood
• When the evaluation of a trade setup focuses first and foremost on maximum return, it can distort its view
What are the Traits of Successful Traders? See what our studies have found to be the most common pitfalls of retail FX traders.
For many traders, the first thought when evaluating a setup is to appraise the best possible outcome. Not just a profitable scenario, but the most extraordinary result for profitability. Of course, such extreme outcomes are very rare; and positioning for a exceptionally unusual outcomes goes against the probability shaping that investment and trading depend on. It is important to appreciate a trade for both its probabilties (the likely and extraordinary scenarios) and its potential (the expected array of returns for the various views). This more democratic assessment can help shape more realistic views for market opportunities that would otherwise dazzle. In today's Strategy Video, we revisit this concept with topical speculation surrounding the S&P 500's drive to record highs, anticipation for Friday's NFPs amid heavy Fed speculation and the EURUSD's bearings under divergent monetary policy.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.