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 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. I can teach you the same price action strategies that have worked for me over the years, and I can teach you how and when to trade them. But, you will have to forge your own ice-cold computer-like discipline to not over-trade or over-leverage; if you can do this you will have a very good chance at making some serious money on a consistent basis, if you’d like to find out more about Forex price action trading, click here.
26 Comments Leave a Comment
thank”s. cheers andrew
Great article, I saw a presentation from the OU about using emotional memory and trading and it was very similar to your article. I’m a relatively new trader and found short term trading was causing me to give back all I made – half in stupid revenge trades! Loving your trading style, been road testing it today and as we speak +150 pips on 4 trades. Going to log off and let them ride but can rest easy knowing I’ve locked in some profit if the markets swing back. Great fire and forget strategy.
Once again you have amazed me with your depth of knowledge and your unique approach to trading. You come at trading from about 180 degrees different direction than other trainers. Well done with your original thought.
I particularly liked that you said not to take EVERY PA setup, but to go with a developed “gut feeling” developed around PA trading, instead of around indicator-based trading.
What I like most about PA setups is that they keep me out of situations where my emotions can cause me to make irrational decisions.
Thank you for your commitment to the well-being of traders, mate. No one else I know of puts in so much personal effort to make sure their clients get more than they paid for.
Hope you are well. A fantastic lesson.
Thanks and Regards
to be candid,i believe your trading method which is price action is by far the the best thing that will happen to me.
i look forword to being a member and then bring in my friends.
I have been using your price action trading methodology for sometime now and I specifically love the set it and forget style of trading. It is less stressful and it leaves me to do other things besides look at my computer screen counting each pip movement. I made over 1000 pips from 5 trades on the EUR/USD this week alone on the EUR/USD currency. Your trading methodology is based on simplicity or what you call trading naked using the “Pin Bar,” support and resistance only. So, thank you for keeping it real and for sharing your methods.
After many years, I am more confident day by day. Every
article you sent, motivate me to be a successful millionaire
in the future.
The gut feeling is hard to nurture because Logic always wants to take over. I am learning to trust my instincts more. Still working out how to find the best edge to enter.
Great Article Nial.
A great article about human mind versus computer robot. Even on demo trade now, I do face emotional fear of loss. Thank you for your great work. Cheers.
Fabio has a good point “I often miss these not so frequent setups “.This is my problem of not seeing the 4 hr setups
as they happen,which leads to un-disciplined entrys on not high probability setups which leads to losing trades of course.Looking back over a chart,there are plenty of opportunities ,oh well thats life.
Your lesson is true,love it,now putting into action is the trick.
I have a background in Mental Health and the function of the mind in our every day reality. Your article draws together the strength of my mind and computers in my quest for trading in the top 5%. I believe it is only this group of traders who are really in the ball park of success.
So I ask myself, “What is the magic ingredient to trade with the elite few?”
Now I quote Nial, “ICE COLD DISCIPLINE”.
I have this enormous resource just sitting on my shoulders, filled with knowledge, beliefs, emotions, intuition, intellect etc etc.
Harness the unified power of mind and computers, I can only dream where my trading future will take me.
Another brilliant article
You seriously have my attention.
Thanks Nial,I do not know what i would do without your valued experience.You are without a doubt a master of your trade and a million times better than all of so called forex trading experts.I am more confident and successful than any time in my forex trading ( I have paid thousands of pounds in training that has got me back to zero)
Good article Nial. Forex robots are crap! By no means can they even come close to what I make out of the FX markets. To me if you have an FX robot it shows to me that one is not confident about themselves, or their abilities.
Nial great article is usual. I really think you should write a book. I’m 100% confident that this would be a best seller in no time.
I have one question though. DO you trade options? How would you apply money management and position sizing on options?
If i ever traded an option it would be an ‘all or nothing trade’. The actual risk would be the cost of the option.
I’m new to forex market, Nial..Yet this week, after read and reread your awesome materials..I’d tried to trade with real account (finally..) and..boom! I love trading..maybe it’s just a beginner’s luck, its okay..still I love this game, I love this business..
Big thanks for sharing, Nial..and Happy Easter.
Good lesson Nial. We need to be Hybrids of sorts…the psychology of the EA’s but the discretionary skills of well-taught human mind. It’s easier said than done. But to be successful as a forex trader, this is the character we must possess. Thanks again.
Super article. I have learned a lots from you.
Big thanks and full respect on you. Great guru.
I am on good momentom of trading.
I like this write up,pls keep it going, thanks
Outstanding article!! :)
My biggest emotional problem is moving the sl to Entry point after 50 or sometimes 100 or more pips. Had I left the sl alone I would have made a solid profit by now instead of a loss. A Robot could solve this problem but as Nial says the disadvantages well outway the advantages and I agree. ;)
Great as always Nial!
great article. Let me just add another advantage of computers, actually.
It is the fact that they can monitor the markets continuously. This (staying glued to the screen) is detrimental for human traders, as then they get trapped into the psychological problems you outline. But, being the computer non-emotional, it can scan markets 24/7 and just pick the correct set-ups, exactly when these sudden market changes you cite do happen.
This is something that often makes me sick as a very busy “want-to-be” trader. I often miss these not-so-frequent setups, simply because I don’t manage to be there. And this is no good to the already difficult-to-control psychology.
I agree anyway that teaching computers to evaluate all the market conditions and the confluence levels that are needed is a very hard task, possibly not reached, yet, but in principle perhaps not impossible (A.I., as you cited?).
Just my two cents
Mankind is a long way from developing a computer to think like a human, given the reality, computers have a limited role in making decisions in price action trading.
Having tried and programmed all sorts of expert analysers/robots, this article really points out why they simply won’t work as there’s the second factor, the market conditions/volumes and the general emotion surrounding the markets that we can not yet embed into the application logic properly yet. I have even tried to combine tweet analysers that I have developed with the robots, but still couldn’t achieve the success I thought I could. I have been following you for the last year and started using your price action strategies, and yes, as long as I can control my emotions, I consistently make money. Thanks for another great article.
Another great article. Thanks.