Prescriptive Descriptive

A scientific approach to studying the forex charts can lead to two types of investigation: prescriptive and descriptive.

1. The Prescriptive Method

This method can be adopted when you don’t have a clue what is going on! Rather than trying to find the fundamental basis for something, the prescriptive method simply asks questions and sees whether the answer comes out positively or negatively. For example, did the currency rise in value yesterday? The answer can be yes or no and it really does not contribute to understanding why it went up. Eventually after having asked a lot of questions, one can theoretically create a method as patterns are noticed.

2. The Descriptive Method

When I was a child, my mum would go insane; she would shout out at me ‘you always have to ask “why?” and “how do you know?”!’ While such a quality is frustrating for a mother seeking to rear a child, yet it is a commendable quality in the context of forex trading! The descriptive method seeks to describe what is happening, to explain not only the what, but the why. As a consequence, it works on a deeper and more fundamental level than the prescriptive approach. Of course, if a person asks what enough, they can get to the why over time.

Which one to Choose?

The difference between both methods can be seen in the context of driving a car. The prescriptive method works satisfactorily, there is no need to know why a car works when driving it, all you need to know is where the ignition is etc. The problem comes when the car starts to break down. A person who drives a car following the descriptive method not only knows how to turn a steering wheel, but knows why the car turns when the wheel is turned. When he hears a noise in the engine, he is able to isolate the noise and explain it. Consequently, he takes his car to his garage, pulls out a spanner and fixes it. On the other hand, the person who takes a prescriptive approach to driving praises the day that mechanics were invented! He could open the engine and spend hours trying to solve the problem, but risks causing more damage.

The same goes for forex trading, there are many people who believe that the why is an impossible task so just ask questions about the graph and create rules from the results. This can work, but it is very inefficient and less profitable as an approach. What is more intellectually demanding, but more profitable is to try and get into the minds of those that influence the price direction of the graph.

One caution is required on this subject. When reading the news after a price movement, pages like Reuters, BBC or the Financial Times may give you a fundamental reason why the price moved in such a direction. For example, as I write, a person at UBS is quoted by Reuters as saying in the context of GBPUSD, ‘Today’s data… continues to show that inflation is a worry.’ This may or may not be true, it is very easy to say such statements after the movement has taken place! The reality is that, as reputable journalists they have to provide a suitable, notably economic explanation for what took place. However, preceeding the movement, generally it is technical indicators which instruct the traders which way the currency is going to go.

Consequently, when we say that the descriptive method means trying to get into the minds of traders, this means understanding what was taking place immediately preceeding a big movement, not reading later what some expert guessed took place, hours after the event. Not only is the descriptive method more profitable, but if problems occur in the prices of the graphs, they are easier to solve. See Componential Analysis.

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