A prediction is defined as a forecasting statement on how things will be in the future. Making a prediction means that you are expecting a certain outcome. In trading, saying that a currency pair will trade at a particular price at a specified point in time is an example of a prediction.
Meanwhile, a bias refers to an inclination or outlook. Having a bias means you believe that a particular kind of behavior is more likely to occur than other alternatives. In trading, being bullish or bearish on a currency is a form of bias.
As you probably noticed, the key difference between predictions and biases in trading is that the latter is open for confirmation or negation from the markets. As a trader, you must develop biases instead of simply making many predictions.
It is normal to have biases on currencies, especially when technical and fundamental factors support your outlook. It is important, however, to discern if market behavior confirms your biases before acting on it by taking a trade. “If you believe it likely to have a definite bullish or bearish effect marketwise, do not back your judgment until the action of the market itself confirms your opinion,” says Mark Douglas in The Disciplined Trader.
“Even if you develop the correct bias about the direction of the market, you still must possess the trading skills to capture those moves,” writes Mike Bellafiore in his book One Good Trade. “Wasting your time on predictions is energy and time lost for what will truly make all the difference, skill development.”
Having a blind prediction on how a currency will trade without taking into consideration market behavior or changes in the market environment could be bad for one’s trading. If you keep trying to prove your forecast is correct but the market disagrees, you’re likely to end up with one loss after another.
Economist John Maynard Keynes couldn’t have put it better: “The markets can remain irrational longer than you can remain solvent.”
At the end of the day, you have to remember that the market is boss. It couldn’t care less about where you think price will go. The market will go where it pleases. A common mistake newbie traders make is believing that successful forex trading is about making predictions and that they can affect the markets with their opinions or trades.
Take for instance the recent drop in USD/JPY. Some traders insisted that USD/JPY should be trading above 100.00, so they kept buying the pair, ignoring signals that the pair is under heavier selling pressure because of U.S. fundamentals and Japan’s tanking stock market.
Because of their inability to recognize and act on the change in market environment, they not only lost their trades, but they also missed opportunities to make pips on the pair’s move down.
As a trader, you must always process information with an open mind and remain flexible. You risk missing both intraday moves and long-term trends if you choose to only see the market signals that support your own predictions.
“Trade what the market is doing, not what you’d like it to do in your nihilistic fantasies,” advises reknowned trading psychologist Dr. Brett Steenbarger.
Remember that the name of the business is trading, not predicting. At the end of the day, your trading results won’t reflect your predictions but your ability to adapt to the markets and capitalize on price action.