Tuesday, September 25, 2012

Forex Signals by Trading What You See

Today is about discussing the concept of “Trading What You See”. This sounds like a fairly simple concept to understand but in reality can be very difficult to implement. In the most simple terms, “Trading What You See” means that you only make your decisions upon the evidence seen on the charts, which can be as good as using the best forex signals. Trading just what you see can be very difficult because we tend to place our own personal bias on our trades. We look for what we want to see happen and ignore what is actually occurring on the charts. We need to recognize that this can be a negative trait that we develop and look for ways to avoid it. Take a look at the chart below and notice the trend that it is in. Most would say that the trend is moving down. Because of this bias we might be looking to short this as it triggers into a trade.

But, as we step back and take a larger look we notice that this is actually just a pull back within a longer term down trend. So with the limited view of this single chart we are making the determination with only a small amount of information. If we don’t realize that we need to see more, we may make the incorrect assumption that the trend is down.

Now, take a look at the longer term chart and you will see that the trend looks a lot different. In the chart below you can see the red line which indicates the area of the top chart. As we look at the big picture we can see that the trend is clearly moving up. If we don’t look at the full picture, or if we become to myopic in our view we can miss seeing what is really happening.

The other issue with “Trading What We See” is that once we enter a trade we do not want to be wrong so we end up holding positions regardless of what is actually happening on the charts. Knowing that it is OK to be wrong can help us exit quicker when things go against our trade. By looking at what is actually happening and making the decision to close a trade based off of the evidence we are doing the correct thing. Unfortunately this is difficult for many traders. Our emotions and psychological desire to be correct make us want to avoid what is actually happening on the charts and we start trading on our hopes and desires.

By learning how to trade what we see we can avoid the poor decision making that comes when we trade from our emotional side. In order to avoid this problem we need to be able to recognize when we are beginning to trade off of hope instead of the evidence we see on the charts. Again, this is easier said than done but something that you need to practice and learn to avoid. By trading the evidence we are trading like the professionals do and are able to make the decisions based off of the facts. Take time to review what you are doing and make sure you are not trading with your emotions.

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