Stop Predicting Forex Price Action!

Enough experience in the forex market can delude some traders into believing that they can fully predict price action. After all, if you have years of screen time under your belt and you’ve put in the 10,000 hours in developing your analytical skills, it can be tempting to assume that you know the markets inside out.

This kind of assumption is dangerous because it can eventually turn into what I’d like to call the “trader god complex”, wherein one has an unshakeable belief in his or her infallibility in predicting future price movements. This is typically manifested when a trader is overconfident with his ideas that he refuses to acknowledge the possibility of error.

But, as anyone who has had his fair share of losing trades (and that’s practically every trader out there!) can attest, uncertainty is part of the forex market’s character. Nobody – not even the biggest financial hotshots who have access to loads of economic information – can come up with 100% accurate predictions for price action. Insisting that you have some special ability to forecast exactly how a currency pair will behave can ultimately lead to your downfall as a trader.

Of course this is different from getting a good feel of market behavior through constant deliberate practice. What this process aims to achieve is the ability to actively learn and improve throughout your trading career. This entails being able to accept your losses, admit your mistakes, re-evaluate your trade strategy, and make the necessary changes. In fact, the goal of deliberate practice is the total opposite of thinking that you are an all-knowing and all-powerful trader!

Focus instead on being able to adjust to market uncertainty. But how can you be able to make adjustments if you refuse to accept that it’s impossible to completely predict market behavior?!

As I mentioned in one of my previous articles, it is normal for traders to develop biases for currencies. After all, it’s precisely these biases that guide us in looking for profitable trade setups, right? Doing your homework in analyzing the markets and staying updated on economic events should help you figure out if the current environment supports your bias or not. Just make sure that you stay flexible with your biases to prevent it from turning into a prediction, which is no longer open to confirmation or negation from market factors.

  • Thank you for this.

    • Dr. Pipslow

      Glad you liked this article. Thanks for checking out my blog!

  • Justin

    A real eye opener, great read.

    • Dr. Pipslow

      Thanks for the kind feedback!

  • simon wong

    I trades in currencies in the short term, typically day trading and I find that developing a bias can be hazardous to trading. I perform best when I take a neutral stand and have no views of the market. When the technicals say buy, I’ll buy. When it says sell, I will sell.

    Let me give you an example of what can go wrong when I have a personal bias. Say I am have a bullish bias after reading a fundamental report. I then take a look at the 15 min chart and the technicals are bullish and confirmed my view. I take a long position.

    The trade goes my way but suddenly the technicals turn bearish (this happens often in short term charts where the trend changes frequently). Because of my earlier bullish bias, I tend to ignore the bearish signals until it is too late.

    This is the main problem. Once I have a bias, I tend to look for signals to reinforce that bias and ignore contradictory signals. I loose my objectivity and that is bad for a trader.

    Another major problem for short term traders is that it is very hard to stay flexible with our bias because we do not have access to real time information. We form our bias based on the last known information but that could already be outdated.

    • Dr. Pipslow

      Very well said. Confirmation bias does tend to influence trading decisions from time to time because it’s human nature to want to be right more often than not. Thanks for sharing your thoughts and for reading my blog!

  • I find that trading is like kissin’ your girl. If you get close and give her kiss and you don’t get the immediate right response, you just smile an’ go on about your business, but if you get the response you’re lookin’ for… you stay in there as long as you can.

    • Dr. Pipslow

      LOL that’s a good way to put it! My bud Big Pippin will love this haha.

  • utalk

    i liked especially the part “the goal of deliberate practice is the total opposite of thinking that you are an all-knowing and all-powerful trader!”.

    • Dr. Pipslow

      Thanks for checking out my blog and for the feedback!

  • vasilis nouskalis

    When you are looking for a good setup, what do you do?
    do you not predctic price action?

    • Dr. Pipslow

      Predicting has more certainty involved. In trading, I’d like to think that you’re taking setups based on more likely price action scenarios versus saying that a pair will definitely trade at a certain level later on.