Investing in the currency market is a complex process, but that’s what makes it a viable option for people of all persuasions. Much like the game of poker, forex trading is a practice where various skill sets can flourish.

Indeed, while some poker players will analyse the odds of certain cards falling and their opponent’s range (applying a statistical likelihood on players holding certain hands), others will “read” their opponent’s facial expressions and ticks in order to gain an insight into their mindset.

Both player types can be equally successful at the poker table because the game’s dynamics are such that mathematical analysis and psychological analysis are equally valid. While forex trading might seem like a world away from the game of poker, the two pursuits actually share a number of common dynamics.

Forex Trading is a Varied Discipline

In fact, if you scroll through a list featuring some of the most common forex trading strategies, you’ll see that everything from indicators and oscillators to current news and events can be used to guide a trader’s trades. Whether you’re following the market sentiment or analysing divergence, Fibonacci indicators or candlesticks, forex trading strategies are as varied as the strategies poker players use to make sense of an incomplete dataset.

Essentially, when you break it down, forex trading is the process of using past data to predict the future. Much like a poker player who has an incomplete set of information (i.e. they can’t see their opponent’s cards), forex traders need to assess the variables available to them in order to predict the movement of the market and make the best investment.

Is there a “Best” Way to Trade?

So which way is the best? In reality, there is no “best” way when it comes to trading forex. While some traders will rely almost exclusive on indicators and others will use the sway of public opinion, the salient strategy is to use a combination of the two.

To go back to our poker analogy, the leading poker players use a combination of mathematics and psychological analysis depending on the context on situation.

For example, if someone is swaddled in clothing in order to hide their face, then a player will need to run through a variety of indicators, i.e. the size of the player’s stack, their bet size and the amount of money they stand to win, to analyse their opponent’s most likely holding.

Conversely, if a player is smiling from ear-to-ear each time they look at their hand, there really is no need to run through the mathematics of the situation in order to know that they have a strong hand.

In a similar vein, forex trading can be approached in a similar way. Take the impending “Brexit” situation in the UK, for example. Whether or not the UK decides to leave the EU, the lead up to the referendum will have an impact on the value of the GBP and the EUR. Depending on the arguments both sides present and the way public opinion appears to be moving, the GBP could either increase or decrease in value.

In this situation we can almost look beyond indicators and simply look at the psychology of the situation. Of course, we can’t ignore indicators completely, but we can lean more towards a news-based analysis of the situation in order to predict the movement of the market.

When the Context is Unclear

In contrast, if we’re in a relative state of calm, then it becomes more important to look at technical indicators such as moving averages to give the market some context through which you can make a salient prediction. For example, Moving Average Convergence Divergence (MACD), as developed by Gerald Appel, will tell traders when to buy/sell based on the intersection of a line based on two moving averages (12-period and 26-period).

By subtracting the 26-period from the 12-period to create a “main line”, the trader can then look at the nine-period exponential moving average of the “main line” to create a trigger point. While this kind of analysis may seem more complex than reading the news, that simply isn’t true. Yes, it’s true that breaking down the numbers to create a MACD is more “scientific”; however, an analysis of the news actually takes a range of less tangible skills.

Build a Base Then Study the Context

Trying to understand the psychology of the market requires a vast amount of experience and therein lays the issue. Novice poker players are often told to run through the basic mathematics of common situations before they start to explore other strategies such as reading tells (physical indictors). The same could also be said for aspiring forex traders.

While there is a lot of value in analysing the news and public opinion when making trades, this can be tricky if you’re a novice without much of an insight into the dynamics of the market as a whole. Technical indicators are a great way to build up a level of knowledge and experience from which a trader can then move into other forms of analysis.

In fact, it doesn’t matter if you’re a pro or a novice, using the hierarchy of moving from technical indicators to a more subjective form of analysis is not only useful but the best way to create a successful forex trading strategy.

By Taylor Wilman