Forex Basics

Avoiding the Price Action Prediction Trap

Price action is a vital part of trading forex. It can be an extremely powerful ally or a devastating enemy depending on how you have approached it. Unfortunately, a trap that a lot of traders fall into is the thought that they are able to predict the price action within the markets, you may have been trading for the past few months to a year, on occasion you have stated that it will move one way and it has, this can give you confirmation biases towards your own abilities to predict the movement.

If you have ever watched a football (soccer) match on TV and predicted a goal, or a penalty, or anything like that and you are right. The next game you watch you predict it again and it is right again. The third game comes along and once again, your prediction is right. So you decide on the 4th match to put down some money, you are confident because every other prediction you had was right, well not this time, it goes against you and you lose.


This is exactly the same mentality that a lot of traders get when it comes to predicting price action within the markets. It is possible to gauge and see small price movements, we won’t deny that, but the overall trend and changes in that trend require far more analysis and knowledge than just looking at previous and current charts can give you.

Predicting without analysis is gambling, that is the simplest way to put it. When you analyze something you are looking at the various probabilities that are available, stacking them on one side, eventually you have enough probabilities to work out exactly which way the markets will move. Making that choice gives you an advantage over the other side, however, this does not mean that it will always go your way.

Many newer traders actually need this experience, a boost in their confidence and then a loss based on their precision, it is a humbling experience that can help to cement the idea that further analysis is actually needed and that predicting price action is not easy, ultimately bringing them back down to earth and allowing them to start learning how to analyze rather than predict.

There is the catchphrase saying of, “Say what you see”, so in Forex, it is important to trade what you see, and not what you think. Getting that I know better mentality out of the way is vital if you wish to become a successful trader. Remember that it is the markets that are in charge and not you, so it doesn’t matter where you think it will go. That may seem harsh, but it is a lesson that a lot of newer traders need to learn.


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