Hypothesis Testing in Forex

Successful forex traders are known to be highly dedicated to their craft. For them, the trading session does not close when they go home, and the trading week does not end when the weekend begins.

Indeed, most forex traders see trading as a lifestyle rather than a job. They live and breathe the markets 24 hours a day, 7 days a week and that is probably why they chose forex in the first place, since it is the market that stays open the longest.

But they are not always trading of course, as good traders know that it is not wise (nor healthy) to spend every hour of the day holding a position.

Instead, when forex traders are away from the markets they are forever going over positions and trade setups in their head, or looking at chart patterns from the day’s markets on paper. In short, they are using their spare time to test hypotheses in the markets.

In the bath

Testing hypotheses in the forex markets can be done at any time, even in the bathtub. It is not uncommon for some traders to take charts with them wherever they go, so that they can look for patterns and work out trading ideas without the constant distraction of open markets and flashing quote screens.

However, the important thing to remember when looking at the markets at home, or anywhere else, is not to take a passive approach.

If you utilize a passive approach, you simply look at the charts; you may find some good ideas but you won’t remember any of them. In that instance your time is as good as wasted.

Be scientific

Instead of looking at the markets passively, it’s important to be scientific. Any idea or hypothesis that you come up with at home needs to be tested so that the work you are doing is not a waste of your time.

Take notes of your ideas and then go and compare them to the real market to see exactly how your ideas would have played out, bar by bar.

If you see a pattern that you think leads to a good buying opportunity, check the next few bars of the market and see whether your idea would have held up.

Indeed, a good idea is to do this process in reverse; that is, to print off some old charts, where you don’t know what occurs next and try and predict their movements. The more you do it and the more hypotheses you test, the better you will get at predicting the market’s turns.