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Objective vs. Subjective Forex Trading

March 31, 2014 by

Generally speaking, there are two possibles ways to trade in Forex (other than random): objective and subjective. The first way is based on measurable and testable methods, while the second is based on unmeasurable and untestable techniques. I am currently reading a book about objective methods in technical analysis of financial markets. It offers an in-depth explanation of what constitutes objectiveness in TA. However, the concept of objectiveness can be applied to the whole process of trading: be it technical, fundamental or sentimental analysis, specific trading decisions and position size calculation.

The whole objective vs. subjective comparison can be reduced to four main concepts:

Objective analysis — consists of strictly defined and testable rules. Even if the rules are based on fundamental analysis, they still can be objective and thus testable. For example, “buy on positive interest rate changes; sell on negative ones” is an objective rule. Whereas a rule from technical analysis that would sound like “buy on uptrend; sell on downtrend” is obviously a subjective one.

Subjective analysis — is not based on clearly defined and testable rules. It encompasses not only “gut feeling” trades but also a huge portion of current technical and fundamental analysis found on various Forex related websites. The main disadvantage of subjective analysis is that it is not possible to prove or disprove its validity (profitability). Even if you follow some more or less strict rules but cannot define them into a mechanical trading strategy, you are also practicing a subjective analysis. It might be so that the method is viable, but your final trading history will be the only result of the method’s test.

Objective output — no matter what type of analysis you are using, the output of the analysis can be in a form of clearly defined entry and exit signals. You might be fortune-telling using a cup of coffee, but still produce something like “buy EUR/USD if it reaches 1.3434 before Friday; close position at 100 pips profit or 50 pips loss.” The best thing about objective output is that you can still measure the profit level of someone’s signals even if he is basing his analysis on subjective factors.

Subjective output — shows no clear entry and exit levels or timeframes. If you see a sentence like “I am bullish on gold.” or “The dollar will fall soon.”, you can be sure that you are dealing with subjective output. The problem with this way of signal formulation is that you cannot test it properly, even when the analyst uses some objective and testable method of analysis.

It is definitely possible to pair subjective and objective methods of analysis or output. That is what I am doing with my occasional chart pattern posts — they are based on subjective analysis (I do not know how to properly formalize my methods of choosing the chart patterns) but produce objective directions for trading, which I execute with a fully automated expert advisor. So, if my analytical method proves wrong (for how much a subjective method can be proven wrong), I will at least know that the reason is not in some poor interpretation of signals. And how about your methods?

What methods of trading do you use?

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If you have some opinion on the topic of objective and subjective methods of currency trading, please feel free to talk about it using the form below.

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