The human mind vs. computers in forex trading
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 develop a “gut” human trading instinct, this also means they lack the ability to commit the emotional trading problems that plague so many aspiring Forex traders. 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.