A common dilemma for FX traders is whether to adopt a manual or algorithmic trading strategy that produces profitable outcomes over the long-term. But this question requires an individual to really understand their own capabilities when it comes to making decisions in high-pressure trades; and to recognize how technology can help overcome limiting psychological habits. All FX traders are susceptible to human tendencies that can affect judgment. But those who have the ability to monitor the patterns of their own mindset stand a far greater chance of developing a strategy that is consistently profitable.

Manual trading: benefits and limitations

A manual strategy relies on the discretion of an individual trader. Substantial trading experience and a deep knowledge of the FX markets are huge positives when it comes to forming profitable trading strategies and should never be discounted in favour of algorithmic technology. Experience nearly always equates to competency. This means the experienced trader will have managed enough trades to know the dangers of acting on blind patterns and gut instinct, while knowing to avoid trading at times when the markets are particularly volatile. But even experience is prone to human error - and this is the negative side to solely placing trust in a manual trading strategy. Despite these psychological mine fields, if FX traders take the time to watch their own psychological traits, it can lead to a dramatic improvement in the ability to make a manual trading approach successful.

Recency Bias

Take recency bias for example. FX traders can become influenced by the most recent trading results, without considering the bigger picture. Consider if a trader’s most recent trade loses, after a particularly pleasing run of results. Does this mean their manual trading strategy is failing? Of course not, the long-term strategy is still overwhelmingly positive. But these losses can cause traders to doubt their approach and whether they can generate consistent profits from the market anymore. Self-doubt leads to rushed and costly decisions, and this is real danger of manual trading. A simple way to counter recency bias is to keep a detailed record of previous trades. A manual strategy can then be refined by evaluating the hard evidence and taking emotion out of the process.