Cognitive dissonance: when you get funny feeling one is lying

In this post I would like to explain Cognitive Dissonance – which is that funny feeling when you look at two charts and come away that something is not right. For this story, let us refer to some of the material below.

 

That funny feeling about USDCAD and WTI

I posted this chart yesterday (in our private section).

USDCAD 4-hourly chart

USDCAD 4-hourly chart

As an interpretation for non-Tflow® followers, this chart simply says that USDCAD is supported and could be a buy.

But WAIT! Because just 2 days ago, I posted this chart of WTI and it says buy as well!

WTI daily chart

WTI daily chart


USDCAD and WTI are not supposed to walk hand in hand in a strong positive correlation. From Mataf.net,

Correlation measures the relationship existing between two currency pairs. For example, it enables us to know whether two currency pairs are going to move in a similar way or not.

 

Too bad Mataf does not have WTI in its ‘Forex Correlation’ tool but USDCAD and WTI are not supposed to have strong positive correlation. They are supposed to have strong negative correlation and this is what it looks like.

USDCAD vs WTI daily chart

USDCAD vs WTI daily chart

This means that when WTI shouts ‘buy’, USDCAD should be shouting ‘sell’.

I hope that you get a sense of what cognitive dissonance means by now. When USDCAD and WTI both shout buy, there is cognitive dissonance.

 

Takeaway?

Take a look at the right most price action on the last chart above (USDCAD vs WTI daily chart) which shows what happened after.

WTI kept support, rallied higher while USDCAD broke support. When you have funny feeling like this, don’t ignore them. What you could do is to give both a pass and be an observer only. On the other hand, when two or more charts give you a strong feeling because they agree, that is probably very strong setup.

 

Note: Read my other post today about rotational play ‘DJ30 and DAX over, back to forex‘. Together these are some of the inputs that form a trader’s experience/that transmits additional vibes to help trading.

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005. Soh Tiong Hum is a member and regular speaker at Technical Analysts Society Singapore events and has a bi-monthly lunch time event at IG Singapore on forex and stock markets. He is an avid blogger on technical analysis topics; his Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX. Come find Tiong Hum on Google+
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