Currency Trading and Trading Software

Forex trading software is in no short supply these days. A simple Google search for “Forex trading software” or “Forex trading robots” will turn up well over a million search results. The prevalence of these relatively new market analysis and trade-execution programs poses a very relevant question:Which is more effective at analyzing and trading the markets, the human mind or computer programs?
This article will discuss the advantages
and disadvantages of the human mind and of computer trading programs, and it will conclude with my personal perspective of why I believe the human mind is without a doubt the ultimate Forex trading and analysis tool.

Price action reflects the aggregate belief structure of all market participants

Free markets are created by human beings. Specifically, they are created by the beliefs that human beings hold and act on about whether the price of a particular security is too high, too low, or just right. Essentially, markets are a reflection of human emotion, and price action is the picture created by this emotion.
Just like human moods and emotions, markets can change very quickly, moving from calm to volatile in the blink of an eye. Taking this into consideration, it seems a bit counter-intuitive to suggest that a computer trading program could do a better job analyzing and trading a market than a skilled human mind. After all, computers are anything BUT emotional, so relying on a mechanical trading program to effectively predict the outcome of something that is almost purely emotional, does seem a bit silly. However, computer trading programs do indeed offer some advantages over the human mind, mainly in the realm of trading psychology.

Computers are not emotional

The ironic aspect of computer trading programs is that while they do not possess the ability to commit the emotional trading problems that plague so many aspiring Forex traders, they also lack the ability to develop a “gut feel” human trading instinct. Computers are ice cold, and a Forex “robot” trading program is only going to operate according to how it is programmed. This means that if it loses on a trade it’s not going to execute another trade right away out of anger or frustration; instead it is going to wait until the next pre-programmed trading edge appears in the market. Thus, the lack of the ability of a computer program to interpret and analyze human emotion is both an advantage and a disadvantage for computer trading programs.
So, what can we learn from computers about managing our emotions when trading the markets? We can learn this; we should not react to the market based on what happened in a previous trade. We should only react to the market based on what it is currently doing and whether or not our trading edge is present. We don’t have to use Forex trading robots to trade the markets, but they can definitely teach us some very important things. Mainly that we need to use our ability to interpret emotion and develop “gut” trading instinct to our advantage, and not allow this ability to work against us by giving into the emotion that results from winning or losing trades.
Emotional trading mistakes are the main reason why most traders fail to make money consistently in the markets, and the elimination of emotional trading mistakes is the biggest advantage computers have over the human mind in the markets. As far as analyzing and picking entries, the human mind is a far superior tool to computers, especially when it is trained to trade based off the raw price action strategies that occur each week in the market. For a computer to rival the ability of the human mind to spot high-probability entries in the market, we would need to have artificial intelligence, and we are not at that stage in computer development yet.

Developing your discretionary Forex trading sense is important

Yes, markets do form similar signals that are somewhat repetitive over time, but there is a lot more that goes into deciding to pull the trigger on a trade than what a computer program can calculate. A large part of Forex trading success is gut-feel, no matter how much some people in the trading world will preach against gut-feel trading, it really is something that traders need to develop. The trick is that you need to develop your gut-feel or discretionary trading instinct around an effective Forex trading strategy like price action analysis that gives you a frame-work to build your market perspective on.
We can develop our discretionary trading instinct built on the foundation of price action, it’s discretionary price action trading, meaning you don’t take EVERY single price action signal that forms. Instead, you learn to trade these price action setups according to market conditions and from confluent levels in the market. So, it is not just the price action setup or signal we are looking for, it is the properly formed price action signal occurring in the proper market conditions or at the proper level that we are looking for. Developing this type of trading skill and market perspective is what I teach here at learn to trade the market, and its how I personally trade and how I became successful in the markets. A computer program will simply see a “pin bar” or some other definable signal, but what it cannot do is decide effectively whether or not that pin bar SHOULD be traded according to the discretionary trading skill that the human mind can achieve.
In my opinion, Forex trading success depends upon developing an effective perspective on price movement and market mechanics, combined with the ice-cold discipline of a computer trading program. So, we are essentially trying to take the best aspect of computer trading software, which is the ability to not let previous trade results influence our future trading decisions, and combine this with the unparalleled ability of the human mind to interpret the raw emotion that is reflected via price action on a simple Forex price chart.

A computer can’t teach you to trade

Finally, another thing a computer cannot do is teach you to trade effectively. The most successful traders in the world are not blindly entering buy and sell signals derived from some trading “robot”. They are acting on years of live market experience and a very refined discretionary trading sense that is built upon analyzing price action.