There is a great Richard Pryor routine in which the comic lectures the audience about how the only way to respond when your spouse catches you cheating red-handed is by calmly stating, "Who are you going to believe? Me? Or my lying eyes?" While this line always gets a huge laugh from the crowd, unfortunately, many traders take this advice to heart. The fact of the matter is that eyes do not lie. If a trader is short a currency pair and the price action moves against him, relentlessly rising higher, the trader is wrong and needs to admit that fact - preferably sooner rather than later.

Analysis of the EUR/USD 2014-2015

In FX, trends can last far longer than seem reasonable. For example, as you can see below, in 2014 the EUR/USD continued to fall despite the belief of many that a bounce was forthcoming. Notice how the pair moved from a high of 1.3993 and continued to trend lower all the way to 1.2095. This extreme trend lasted for many months before finally finding a bottom in March 2015.

Fig 1: EUR/USD

When a currency is trading within a strong trend, many traders start to anticipate a reversal. Betting on a reversal and then watching the price move in line with a position can lead to many harmful biases. For example, traders who bought when the EUR/USD triggered a buy signal, such as the one shown on the chart below, and then saw the rate move in their favor, would have started to think that they correctly identified a bottom. However, as you can see from Figure 3, this feeling of victory would be short lived and as it turns out, the trader would have been betting on a reversal at only the mid-point of one of the most major downtrends in recent memory.

Figure 2 – EUR/USD

Figure 3 – EUR/USD

 

Eventually, the EUR/USD did find a bottom, but the trend did not reverse in the same way that many were hoping. The majority of traders anticipating a trend reversal would’ve likely got caught in a losing position that would take years to bounce back from.

 

Right Place, Right Time

In FX, successful directional trades not only need to be right in analysis, but they also need to be right in timing as well.. That's why believing "your lying eyes" is crucial to successful trading. If the price action moves against you, even if the reasons for your trade remain valid, trust your eyes, respect the market and take a modest stop. In the currency market, being right and being early is the same as being wrong.
 

Know the Difference Between Scaling In and Adding to a Loser

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