Beware the Hindsight Advice of Price Movements "Experts"

Hindsight is easier than foresight especially if you are an expert. Our weekly guest blogger explains here why it is

Vlad

Vlad Gubernat is a full-time trader based in Romania who shares his thoughts on his blog, JLTrader.  

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There are a lot of “experts” out there who will purport to know the reasons for every 20pip move in a currency pair or stock index. I just want you to think about it for a minute. You will see how impossible it would be for the analyst, strategist or whoever writes these pieces to ascertain just why those who bought or sold during the day did so.

In order to make statements like “a better than expected Ifo report drove the euro higher” with any degree of accuracy it would be necessary to get in touch with every buyer and seller for the day, find out their reasons for the trade and then strike a balance.

These buyers and sellers are all across the globe, from the traders with a $500 account to the big banks and hedge funds dealing in billions. It is therefore absurd to place any reliance on statements that this or that was the reason for the advance or the decline.

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This is not only to emphasize the necessity of taking these kinds of reports with a big grainbig grain of salt of salt, it is also to prove that no one actually knows what produces these small moves. None of the known events (the ones you can find, for instance, in a forex calendar) in and of themselves move a currency pair.

If you spend enough time observing the market, you will notice that the price action cannot consistently be reconciled with the reasons given by the “experts.”

For example, if this month the Ifo is better than expected and the Euro finishes higher the day of the announcement, there shouldn’t be any surprise if next month, with a still better than expected reading, the Euro will finish lower.

It is not the news nor the actual readings, nor the officials’ statements that produce the fluctuations, but the effect of all these things on the minds of traders. Every buy or sell order has a reason behind it, a hope or a fear, and all the news, facts or officials’ statements have a certain influence on the minds of traders and investors, causing them to execute those orders. It is therefore not the day’s developments per se, but their effect on the minds of individuals which is the underlying cause of the price movement.

To better illustrate all this, let’s use the most recent example available, today’s opening gap in euro. Supposedly, the Greek parliamentary elections on Sunday had something to do with it.

It sounds plausible, but then why did the AUD/USD gap down as well? And why did the EUR/USD not only close the gap, but is higher at the start of the European session than it closed on Friday night? If we want to be sincere with ourselves, the answer is that we don’t know. And as traders, we don’t really have to know.

 

This article is part of the Forex Magnates Community project. If you wish to become a guest contributor, please get in touch with our Community Manager and UGC Editor Leah Grantz leahg@forexmagnates.com.

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