Trading is Not About Prediction

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Trading is Not About Prediction

Sitting at dinner last night with several friends I was asked my thoughts on the stock market — a question I get asked numerous times each day. My response is usually the same “I am a trader, I don’t have thoughts on the what the future holds for the market.”

I like saying it because it opens a dialogue which differentiates prediction from trading. The above statement isn’t totally accurate. Of course I have thoughts on the economy, the stock market, trends, unemployment and politics….but these opinions are held distinctly separate from my trading.

Most people have the notion that if they can predict where the stock market (or any asset) will be in a couple months (or any time frame) they can make a boat load of cash. Of course even if reasonably certain about where the market will be there is always some room for doubt…we just never know for sure!

Yet we try to convince ourselves that we are going to right. We basically “hype” ourselves up to take the trade by telling ourselves “Oh, yeah, it will work out. I am going to make a killing. This is going to be awesome.” We base a trade off our prediction and our hyped up viewpoint.

One problem is that if I succeed in hyping myself up I am no longer considering the possibility that I might be wrong. This means I am more inclined to risk more on the trade than I should. It astounds me that investors will put all their money in one or two stocks. They predict the stock price will do up, and are betting everything they have on it. This is NOT how you should approach the markets, no matter what time frame you are trading on.

Always allow for the possibility that you are wrong. Do that by only risking 2% or less of your account on each trade. That way if you are wrong, it doesn’t hurt too badly. I risk than 1% of my account on each trade.

Even if the market does go up, our prediction is too general to be of use. The market is not like flipping a coin like most people think. It doesn’t only go straight up or straight down immediately after a trade is taken. It can go up a little then drop a lot, then rally a lot, and then drop a little, and then do almost nothing for days on end. We may expect it to move a lot and it doesn’t, or move a little and it moves a lot. Look at the market each day and determine how it is moving to establish some expectations.

If there is very little movement, then believe what the market is telling you. Don’t try to predict when it will breakout or start moving again. The price will tell you when that happens. Trade what the market gives you.

If the trend is dropping and there is a weak pullback, we can expect that the price will keep dropping… but just acting impulsively on that thought is a baseless prediction.

Avoid baseless predictions. Every trade should be a based on a strategy that has been tested and that you have traded in a demo account showing it to be profitable for you.

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Assuming a strategy will work for you because the strategy worked for someone else is also a baseless prediction. We are all slightly different and a strategy I use may not work for you, or a strategy you use may not work for me. Test it out. Don’t leave anything to chance.

Final Word on Prediction

You don’t need to know which way the market is going to go to make money. That is why traders seek out strategies — to eliminate the need for prediction. The strategy gives a mathematical edge and tells them exactly how to enter and exit trades.

Profit Without Predicting the Market

Additional knowledge accumulation is not always beneficial when trading financial markets because some information can make us more ardent in our views and opinions, so we make bold predictions that turn out wrong. And incorrect predictions can be costly when real money is on the line, especially when we take positions against the prevailing price movement and in anticipation of a quick and sharp change in price direction, but then the reversal never happens.

Key Takeaways

  • Predicting the market is challenging because the future is inherently unpredictable.
  • Short-term traders are typically better served by waiting for confirmation that a reversal is at hand, rather than trying to predict a reversal will happen in the future.
  • Viewing price action as a series of waves is an alternative to predicting future price moves.
  • Establishing significant points to buy and sell should be based on what price is actually doing, rather than what we expect it to do.

Investors, especially short-term traders, are usually better off waiting for the movement in price to confirm a trend or reversal rather than try to predict what is going to happen next. Section two of this article looks at some ways we can rework our thinking to gain a better edge. The first section looks at the reasons why predicting can be a problem.

The Prediction Problem

  • The future is uncertain.No matter how good our analysis is, it is only as good as the information that is available right now. We cannot know for certain what will happen tomorrow. Analysis in regards to likely movement in the future is done with the idea of “all else being equal.” This means that we assume a stock will go up based on a trend if things remain as they are right now.
  • We can’t predict all contingencies.While on some days (in fact, many days) everything does remain equal, there are always days, weeks, months, or even years that defy the odds. During these times, predicting can be especially dangerous if expectations turn out incorrect. For example, predicting that something will go up when prices are falling can cripple a trader’s finances, especially since we can’t know for sure how the market will react to further news or information that may become available. When prices are falling, even good news may not push prices substantially higher, and when prices are rising, even bad news won’t necessarily have a long-term negative effect on price.
  • If the overall market moves higher, this does not mean a stock will also move higher.Analysis of individual securities is often based on the sentiment of the overall market. This can mean a trader expects one stock to rise because the market is rising, or vice versa. This does not always occur, especially in shorter time frames. Unfortunately, an alternative scenario also occurs where a trader expects one stock to outperform while the rest of the market continues to fall. Traders must be aware of market dynamics as well as individual stock dynamics. Either way, the end result is that we want to be trading in the direction of current cash flows, not against them, whether it be in the overall market or individual securities.
  • Predicting that a particular stock should move higher is vague, and the investment decision will rarely include a profit or stop-loss exit point.While not always the case, inexperienced traders predict that their equity positions will rise and assume that they will be able to get out near the top if they are correct. In reality, such a vague plan rarely works out. Therefore, all traders must have a plan for how they will enter and exit a trade, whether the trade results in a profit or a loss.
  • The holding time for stocks has decreased along with increasing volatility.Stock market volatility has increased over the years, while the holding period for securities has fallen off. Buying and holding is still a viable strategy if the method is well-devised (as with any trading method), but due to limited capital, buy-and-hold investors must be aware that volatility can reach very high levels and must be prepared to wait out such periods. Active traders trading on shorter time frames should trade in the direction of price movements given that volatility has increased, and even short-term moves can sustain overbought or oversold levels for extended periods of time.
  • Statistically, prices rarely move in straight lines for long.Predictions are often based on strong emotional feelings—the stronger the feeling, the stronger the trader may expect the price reaction to be. Thus, the trader assumes that the stock will fly in the anticipated direction in a straight movement, leading to large profits. When we look at all the securities in the world and then factor in time variables, having a position right before a major move is very unlikely, statistically speaking. Traders are far better off trading the averages and trading in the direction of price movements to gain profits as opposed to looking for one trade or stock that rises aggressively in their favor in a short period of time.

Alternatives to Prediction

Given that we now understand trying to predict a turning point in the market can be very costly, one asks, “If I can’t predict, how do I make money?”

Whether attempting to predict the market or not, generating consistent profits from short-term trading is exceedingly difficult, even for the most experienced investor.

The answer is that we follow the price, and we can do so by following the guidelines below. This is not an exhaustive list of market dynamics, but understanding these should help traders find themselves more on the right side of the trade than on the wrong side.

  • Prices fluctuate in waves.Looking at any chart after understanding the points above, all traders must understand that prices move in waves on all time frames. This means that, even though prices may fall, traders don’t need to panic and jump out of positions as long as the longer trend is still up. However, they still should have an exit point in case prices are no longer in an upward trend in their time frame. Short-term traders can participate in each of these waves but must remain nimble and not be tied to one direction when doing so. To predict that prices will move in only one direction is to disregard the factual tenet that prices move in waves.
  • Don’t assume support or resistance will hold.A very common misconception is that support or resistance will hold, or that a break of these levels will cause a substantial breakout. The position traders have often determines what they predict will occur. What traders need to realize is that support and resistance levels are simply important price areas. Making assumptions that a breakout will occur or that a level will hold off a further move is an attempt to predict the market. Rather, traders should watch what occurs around these levels and then enter as momentum moves in one direction or the other. If resistance holds and prices retreat, then a short position could be entered, for example. If a breakout occurs, then trade in in the direction of the breakout. Keep in mind, false breakouts occur, and (to repeat) prices move in waves. Don’t be tied to a position simply because a position showed a profit for a time.

It is better to think of support and resistance as pivot points for price and areas to look for entries and exits. By doing so, we are not predicting that something will occur or going against the prevailing price movement. Instead, we enter into the current price flow. This makes trading “matter of fact” as opposed to emotional. We have picked out important levels that will help us isolate the price waves a market is moving in. Then we can take a corresponding position as prices react at these levels.

The Bottom Line

Predicting the markets can be dangerous and, ultimately, predictions are not needed in order to make money trading. By realizing that prices move in waves and that we should not predict whether important levels will hold or be broken, we can enter trades at significant points but in reaction to what price is actually doing and not what we expect it to do. Traders benefit by remaining nimble in their positions and not being tied to a particular direction because of a prediction.

Do not plan your trades based on prediction

Many people trade this market without any strategy and they focus on only their prediction. They think this market has some trends that can be easily analyzed with their mind. They do not need to spend their time on the analysis and this is their wrong conception. You need to focus on the market trends with your strategy, not with your mind. Many people trade with prediction and they made wild guesses. Not all the guesses turned out to be in their favor and they lost money. This article will tell you why you need to plan your trades based on not prediction but on your strategy. You may have traded the market for many months and you have developed a nice feeling of the trends but that is not going to help you in making your profit. Every trade has to be based on market analysis.

Trade with ration logic

You need to trade the market just like the senior traders in the United Kingdom. The full-time traders always trade the market with managed risk and they never let their emotions to take control of them. Learn to trade the market based on major three types of analysis. If you focus on the technical factors only, you will never be able to make money in the long run. You need to blend your technical and fundamental data to find the best trades.

Use price action signal

Price action trading is one of the easiest ways to make money in the long run. If you ever see the senior traders at the UK, you will be surprised to their high level of accuracy. Price action trading strategy might seem a little bit difficult at the initial stage but this doesn’t mean you will won’t be able to master this strategy. Learn the basic formations of the most reliable candlestick pattern and you will be able to execute quality trades at any market conditions. Being a price action trader you will be able to trade the market with very tight stop loss which will eventually increase your profit factors. And make sure you have access to the best Forex trading account UK to execute quality trades.

Prediction can be a wild chase

The first risks about prediction are it can be a wild guess. People think they will make money when they are experienced but it is not right. Making profit has nothing to do with your expertise as it is based on your performance. We have seen many expert traders fail at making money but they are still consistent. This is the nature of Forex that every now and then you will lose money. When you are trading with an assumption, nothing can be more dangerous than it in your career. You made some wild dreams and you run after them. The chance that you will be successful is very small. You can lose most of your profit in your prediction if you trade in this way. Better you come back to strategy and place your trades on what your analysis told you. You should use the trend and patterns to make your plan, not your prediction.

They can show you the wrong way

Another risk of trading is it can show you the wrong way. As you are trading based on what your mind says and your heart, there is a chance that you will lose money. There are only a few people who have made money with their prediction. Let us remind you that these people have traded for many years before they trade with their mind. As you trade the market for a long time, you develop a sixth sense of analyzing. It does not come naturally as it is developed based on your practice. It is best for novice traders to only use strategy to trade. Prediction, guesses and all these airy things are better left out for the future.

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