What is the main difference between a prediction and a bias? More importantly, how can this affect your forex trading performance?
A prediction refers to a forecast or an expectation for a particular outcome. When you make a prediction in forex, you are making a call on how an economic report will turn out or how a currency pair will react to it.
Meanwhile, a bias is simply an inclination towards an event that may be more likely to occur. Having a bias is thinking that the dollar could have a bearish or bullish outlook depending on how US economic data turns out.
In forex trading, it is important to have biases but traders are often cautioned against making strong predictions. When you make a prediction, it is like you are shutting off other possibilities except for what you are expecting to happen. When you take a trade idea based solely on a prediction, you could hurt your pride if the market shows a different scenario playing out.
A bias, on the other hand, is still open for confirmation. You can have a bias at the start of the week based on previous market themes and dominant price action, but you can leave this up for confirmation by the upcoming data. If your bias is proven wrong, you can just as easily switch sides and take the opposite bias without hurting your psyche.
Remember that the market does not care about your predictions. Even if you are proven wrong and hurting from a losing trade, the market will still continue to trade without looking back.
Instead, when you simply keep a bias, you are maintaining an open mind and letting the market dictate how you should trade and how you might be able to profit. Having a bias is being about reactionary than anticipating price action.
Of course it's normal to have certain predictions as to how price action will fare since most of the analysis, such as technicals and fundamentals, are geared towards picking which scenarios are more likely to occur. Don't forget though to spend an equal amount of time figuring out how you will manage your trade if actual reports or price action turns out different from what you expected.
At the end of the day, it's important to keep an open mind and accept that anything is possible in the forex market. Of equal importance is proper risk management in making sure that you don't lose your money when your bias turns out wrong.