When you’ve listened in school back in grade school when the scientific method was taught, pat yourself on the back!
Having a scientific mindset could provide you with an edge in trading.
Scientific method: The fundamentals
Scientists at all times start with remark.
Simply put, it’s the means of using the senses to collect data about consistencies within the environment. That is where we be aware of patterns, repeat occurrences, or random incidents.
Once a scientist has gathered enough data, theory-formulation would follow.
Humans are curious beings so we regularly attempt to make sense of what’s happening around us. We attempt to clarify our observations by making assumptions or hypotheses.
But after all, a hypothesis won’t mean anything until it’s tested out. If empirical tests support our hypotheses, one could say that they turn into theories which are used to generate future observations.
The fantastic thing about the scientific method is that it could actually teach us the right way to be humble. How, you ask?
By at all times being open to recent and fresh observations, scientists acknowledge the indisputable fact that their theories will not be absolute truths.
For them, having an open mind allows them to embrace the indisputable fact that human understanding will at all times fall wanting nature’s complexities and makes them stay on their toes for brand spanking new evidence that would challenge pre-existing theories.
For traders, this type of open-mindedness may very well be an antidote to overconfidence and overtrading, allowing us to understand that it’s okay to not be right on a regular basis.
So how exactly are you able to trade like a scientist? Listed here are some steps which you could follow:
1. Observe the markets rigorously and search for patterns.
As a trader, you must have already got a basic understanding of the technical and fundamental aspects that typically move the markets.
You almost certainly have an idea of how a selected economic event, similar to an rate of interest decision or a GDP release, could affect price motion or how certain candlestick patterns signal that a reversal may very well be within the cards.
To realize a fair higher edge, you may add to your database of market aspects by making careful observations and noting down recurring patterns.
As an illustration, you lately observed that CPI releases are likely to carry more weight as of late, as forex traders would love to see how the oil price slump is affecting consumer price levels. You possibly can mark these events in your calendar to see how the market normally reacts.
2. Use these observations to create a hypothesis for price motion.
Let’s say you’ve noticed that investors get hungry for more risk each time a central bank talks about adding monetary stimulus.
What you may do is note what actually happened, how currency pairs reacted, and which forex trade setups could’ve enabled you to catch an element of that move.
You possibly can keep listing down these observations in your trade journal until you’re confident that your hypothesis is able to be tested.
Take into account that it will even be helpful to provide you with a play-by-play commentary on price motion, which could include the value motion prior to the event, the initial response, and the essential direction that the pair takes afterward.
3. Put this hypothesis to the test by taking trades when similar patterns occur.
Once you’ve enough data supporting a selected pattern that you just’ve observed, the following step can be to place this theory to the test by taking trades when the chance presents itself.
Following my previous example about central bank easing and risk appetite, you may hunt for potential trades prior to monetary policy announcement when the policymakers are widely expected to sound more dovish.
In fact, deliberate practice can be very helpful on this aspect. As you’re taking trades based on those patterns, you must also list down your recent observations and whether you must make any adjustments to your hypothesis.
4. Keep an open mind.
Keep in mind that the markets are fickle and that your hypotheses will not be absolute truths.
As you’ve also probably observed during your trading experience, the market environment may be very dynamic and sentiment can at all times shift on a dime.
With that, you must at all times be open for potential adjustments or completely recent market patterns. Similar to a very good scientist, a very good trader should remain open to recent data.
Changes in the general themes dominating the markets, for instance, typically impact some currency pairs’ reactions to certain reports. There are even times when a currency pair doesn’t react to a high-impact report in any respect because there are greater aspects in play!
Keeping an open mind also can enable you to increase your hypothesis to accommodate other aspects that would affect price motion. Give it some thought as always fine-tuning your theories and trading plans.
By taking trading plans which are based in your observations and hypotheses, you may construct confidence in taking those setups. This might also assist you to in risk management by knowing when to risk big or when to play it protected.
Also, by keeping a scientist’s mindset when trading, you’ll have the ability to treat each trade as a source of latest information that would either enhance or disprove your theories.
With that, you’ll have the ability to achieve something even from losing trades as you employ them, along along with your winning ones, to develop a greater understanding of the markets.