When practicing
Forex Trading, or any form of speculative investment, there is a risk of developing inappropriate behaviors that do not reflect what a trader should be: a calm, rational, and prudent market operator. These "strange" behaviors are nothing more than
reactions to a condition of perpetual uncertainty. Human nature inherently seeks to avoid uncertainty and tries to respond as best as possible. This happens especially while practicing Forex Trading, an activity in which uncertainty is the key element.
One of the typical responses, albeit fundamentally wrong, can be defined as "
alchemist behavior". In fact, some develop a real syndrome.
Traderpedia has effectively discussed this. We will take their description as a starting point for a small but interesting reflection.
What is the Alchemist Syndrome
Everyone roughly knows who alchemists were (or are, assuming there are still some around). Magicians or aspiring ones, lovers of the supernatural or pure and simple chemistry, they tried to transform lead into gold. They spent years or decades, in some cases an entire lifetime, searching for the secret recipe that would give meaning to their efforts and guarantee them wealth.
As we know, it is not possible to transform lead into gold. Such a recipe simply does not exist. So, while the alchemists consumed physical and mental energy in a useless and self-serving study, the
real opportunities for success passed by them, completely ignored.
These dynamics, although reminiscent of a pre-contemporary era, can invade a sphere that apparently has nothing to do with potions and magic recipes: Forex Trading. The focus, obviously, should not be on the alchemist's goal, but on the tool to achieve it. That's where the real point of contact lies. We are talking about the "magic recipe".
The "alchemist" trader does not try to transform lead into gold, at least not in a literal sense. Similarly, he does not handle particular substances and ingredients. Very simply,
he looks for a method to predict what the market will do, assuming that such a prediction is possible, and that it can concern specific details such as the duration of the trend, the exact point and moment of a reversal, and so on. In short, he seeks the "magic recipe", the method that allows him to solve all his trading problems.
It is no coincidence that "alchemist" traders, if they can be defined as such, are all fans of technical analysis. This practice, which remains essential for reasoned trading, is the only one that
at least potentially allows predicting the near future of the market. More so than fundamental analysis, which is mainly an interpretative activity and does not boast the comfort of numbers and mathematical models.
Obviously, and this is almost taken for granted, the trader affected by the Alchemist Syndrome understands technical analysis in a partially wrong way,
assigning it powers it simply does not have, misrepresenting its purposes.
The Alchemist Syndrome, as we have already anticipated, is simply
a reaction to uncertainty. There comes a time when the trader simply can no longer bear the uncertainty of the market, and gets it into his head - consciously or not - to be able to predict its moments. For some traders this moment arrives earlier than for others. Some traders, unfortunately a minority, are immune to these dynamics anyway. The fact is that when the Alchemist Syndrome arises, it needs to be recognized and fought. Also because it can do a lot of damage. We will talk about this in the next paragraph.
When does the Alchemist Syndrome arise? Essentially, in two different moments. First,
following a heavy defeat or a series of defeats. The trader simply feels the ground giving way beneath his feet, feels overwhelmed by uncertainty, so he looks for a way to placate it, to reduce the effects. Secondly, following a significant victory, perhaps obtained through what
appears to be a successful prediction (often the result of chance). In the first case, there is the need to contain the effects of uncertainty; in the second case there is the
fear of uncertainty, dictated in turn by the fear of not being able to replicate the prodigious result again.
Why the Alchemist Syndrome is Dangerous
From the description we have made, one can already get an idea of why the Alchemist Syndrome can be considered dangerous. It is however good to list some possible consequences of the "alchemical behavior".
Waste of energy. Alchemists wasted their lives searching for a formula that did not exist. In short, they needlessly wasted their energy, both physical and mental. This is the same risk that the trader runs. If he wastes time looking for or developing an analysis method capable of predicting
exactly what the price will do, when it will do it and for how long it will do it, he will not be able to focus on what is really important.
Loss of clarity. The search for the perfect analysis method can turn into a real obsession, especially if the search activity seems to give some timid results. Obsession gives rise to a perception of trading that is not the real one, that is, of a mathematically exact science, so the right equation is enough to uncover its secrets. This perception is very harmful because it exposes the trader to the most "extreme" dynamics of the market, precisely to that uncertainty that he hopes to reduce.
Inability to learn from one's mistakes. In Forex Trading, as in any activity that involves a certain degree of uncertainty and difficulty, it is essential to learn from one's mistakes. To do this, it is necessary to understand them, that is, to understand the causes of one's failure. But if the trader believes that the cause is the use of an imperfect analysis method, in this case not predictive, it is evident that he is looking at the wrong side.
How to Avoid or Cure Alchemist Syndrome in Trading
Obviously, if you can choose, it would be better to avoid it altogether. Also because the Alchemist Syndrome risks doing damage right from the start. To avoid it, or to heal if you realize you have the "symptoms", you need to do mostly mental work. A complicated job, therefore, which concerns perceptions and way of understanding trading.
Essentially, it is necessary to internalize a small great truth. Indeed, two.
The market cannot be predicted. As much as traders, analysts and market theorists may strive, the market cannot be read in a crystal ball. Sure, with a reasonable margin of approximation you can know the future direction of a trend and its strength, but it is statistics, probability. It is useless to waste time with a goal (predicting the future) that cannot be achieved, neither in trading nor in any other activity.
You can come to terms with uncertainty. Clearly, without denying it or trying to defeat it. Simply, by limiting its effects. How? With good money and risk management. Limiting the effects of uncertainty means knowing how much you can afford to lose, and what is the maximum loss a trader can cause. If you know your breaking point, you can plan your trade accordingly (so as never to reach it). In this way, uncertainty is not denied but made, as far as possible, less dangerous.
