Hindsight is the Billionaire in the Rear View Mirror

Every Monday morning after the game, the armchair experts gather round to provide their assessment of how the game should have been played. The game is of course American Football. We call these experts Monday morning quarterbacks and the discussion on the table is hindsight. In American Football hindsight is ”Every aspect of the game – after the game has ended”. For example – the Monday experts will let us all know ”How he should have thrown the ball left instead of right” or ”How the game would have changed if he made that tackle” and ”How my team would have won if the coach picked the right players”. Some of the experts are not only good at using hindsight to determine what should have happened, they are also good at using blame to point out how the game should have enfolded. ”It’s the referee’s fault” they declare when things didn’t go their team’s way.

Now it goes without saying – that hindsight is a billionaire!

Hindsight is also very hygenic and immaculately dressed. Hindsight doesn’t stand in the dog mess or spill hot coffee over his white work shirt. Note : Apologies for labeling hindsight as a male. That is not true. Women are especially good at hindsight too. Take driving directions for example. ”You should have turned back there…”

In forex trading those who have dabbled in trades, will know that trading is a game of speculation, and not hindsight. Forex traders can’t reverse decisions and trade on the past price action. All trades are placed on the outcome of an unknown future event.

Chart analysts will try their very best to find some way to assist them to gather information from the past to help them make a decision for the future. One of those two options is easy, the other not – unless you are a gambler.

If hindsight is the master of the past, and the future is the master of your destiny which of the two masters should you serve?

Or should you serve any of these two masters at all? Can the future and the past somehow work together to provide a successful method of forex trading, or are both as futile as each other? Let’s find out.

Which master would a pure gambler serve? There is no doubt that pure gamblers live to serve the master of the future. A true gambler bets on the next unknown outcome. Without any possibility of a future outcome there would be no place for a gambler to ply his or her trade.

In forex trading there is a concept of chart study known as ”backtesting”. Backtesting is used to test a trading strategy on historical data to see whether the trading strategy would be viable in the future. Backtesting is usually performed with automated trading programs, or algorithms and the programmer will enter particular search criteria such as ‘date from till date to’ , the forex pair to backtest, the chart timeframe ie Daily, and how to display the information that is generated such as – How many wins, how many losses. The win/loss percentage ratio etc.

But generally , all forex traders can do some manual backtesting themselves without the need to invoke computer algorithms. All the trader has to do is to scroll the forex chart to the left to see what happened in the past. Here are some reasons a forex trader might wish to use backtesting to see what happened previously when a certain event came about. Taking one small example, a forex trader could backtest the EURUSD to find out what happened to the price of the EURUSD each time the United States non-farm payroll monthly employment results were announced. Since this NFP announcement is almost always the first Friday of every month, it is not too difficult to record the results manually for the past 12 or 36 months. Another backtesting idea would be to see what price movement occurred every time price crossed above or below a particular moving average and see whether price continued to rise or fall, or enter a range at those past levels. There are so many different ways to backtest that can be performed that there would be too many to trial and then go on to list the results.

We do not want traders to get bogged down by backtesting.

We are saying this because of our own hindsight. Let’s say for example you wished to study human history and become an expert on world historical events. You may even write a thesis on history and obtain a Doctorate. But all this knowledge, however useful (as a team member on pub quiz night) cannot predict what the next historical event in the future is going to be. So please do not become an expert at studying past price action in order to predict the future if you want to succeed as a forex trader.

The best way forward, and since you are reading this in the present (the now) is for you to balance your forex trading by having a healthy balance between the benefits of hindsight and the unavoidable risk of future speculation.

Do not put yourself in the position of a pure gambler. This is a strategy designed to fail and blow your account (lose your money) several times over. Neither put yourself as a forex trader in the position of a backtesting professor. No matter what happened in the past it is never necessarily a predictor of the future. Some events are more random than others and some current events tend to show similarities to past events. The problem with over analyzing past price action is that forex traders are continually searching historical charts, for a perfect trading setup because they desire the future to be certain which it is not. When that perfect trading setup fails, forex traders take a really hard knock and start to disbelieve the whole concept of forex trading, which can never be certain. This creates undue, unwanted and unnecessary stress. Expecting the past to predict the future can be as hazardous as gambling.

If you live within a 10 minute drive to a beach, how many times has the perfect sunny day at home turned out quite differently once you hit the beach? The perfect stay at home barbeque weather turned out to be quite different 10 minutes away on the beach as you settle down in your deck chair to read the Financial Times. Within seconds a sudden gust of wind plays havoc with your newspaper, blowing half the pages into the sea and the other half into a kid’s ice cream while you chase after the flying papers on the hot sand, losing your favorite beach hat to the wind in the process. The weather at home turned out not to be a predictor of the weather at the beach.

By the way – Don’t ever take the Financial Times to the beach. It’s just not cool. Ever.

 

 

 

 

 

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