Trading Predictions – Facts, Myths & Misconceptions
What is it that makes trading so bloody difficult? Why is it that often traders flock to certain tipsters, and pay homage to them like political leaders or religious pundits of some sort?
It’s quite common to hear trading experts say – This stock is for sure going up! or This stock is definitely going to plummet!
It’s the nature of the trading game that requires traders to constantly make predictions about the future events and play their stakes accordingly. Now it’s inevitable that the people who are able to make predictions more accurately than others are bound to stand-out from their peers. Having said that, I can assure you that no expert can ‘for sure’ predict the precise nature and order of future events.
The stakes get even higher when we are routinely expected to know the future events with accuracy.
It makes more sense to make predictions from a macro investing point of view, however, with day trading short living trends are extremely hard to predict.
Can Our Past Be A Good Indicator For Predicting The Future?
Think about common issues we face everyday. According to modern science, human life as we know it has existed on planet earth for over 200,000 years, evolving from Homo Sapiens to modern civilization which has existed for a whopping 6,000 years. We are yet to figure out the solutions to basic human needs or basic social issues. The best way to grow crops, the best way to educate our children, the best way to prospect a job. There isn’t one. The world we live in is constantly evolving – creating new challenges and paradigms as we speak. If we were to base our future actions on our past then we would have found the ultimate answers to every human problem, but this isn’t the case.
Often scientific research for the most part involves studying cause and effect, trying to put clues and hints together in an attempt to figure out past events. Put simply – any problem can’t be answered merely by assembling a cluster of facts. Predicting the future requires judgement, intuition and a bloody good guess to know how things will play out.
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 as ‘humans’ or the ‘technologies’ in hand can make complicated analysis, but it is only good for this current moment in time. We cannot really predict what will happen tomorrow. All technical analysis of markets is done with a presumption ‘all else being constant or equal’. That would mean a stock would move in a certain direction if everything else remained still – which is never the case. The factors that can influence carrying a trend forward or causing a sudden reversal can be just one, or a collection of small events.
Predicting Is A Problem Itself
Since we have now established the premise that odds are never in anyone’s favour. There will always be events that will defy the odds and cripple a trader’s position. Experienced traders know this, and if you are just starting out you will notice that in a market where prices are falling – a good news may not have any effect to sustain the price and the same can happen to a rising stock which defies all odds and remains immune to bad news.
Learn to trade price action as there isn’t any other good prediction than what the stock is doing at present
Price action trading simply refers to trading the current direction of a stock – the trader must know when to enter and exist the market. We will learn more about entry and exit strategies in detail later on.
However, price action is the most reliable tool for predicting short term gains.
Overall Market Direction Can Have No Effect On Individual Stocks
Often technical analysis on singular stocks are made on the assumption or correlation that since the overall market is going in a certain direction, so will the stock move in the same direction – which isn’t always the case. A particular stock can continue to move in the opposite direction of the overall market direction. It’s a common occurance, therefore new traders must take note of this and learn the characteristics and dynamics of the stocks they wish to trade. Initially if you are just starting out and let’s say you want to trade in forex – then it is advisable that you trade a limited number of currency pairs and try to learn as much as you can about them. Every currency pair has it’s own personality and unique set of characteristics in terms of how they behave when the market is volatile or docile.
Support & Resistance
The topic of support and resistance analysis requires a dedicated post, but I would like to mention a couple of important points that may help newbies reading this post. The use of Support & Resistance is almost considered the holy grail of trading as it serves as an indicator of upper and lower threshold levels for any stock. We must always remember that support and resistance levels are there to be violated, otherwise all of the trading graphs would look the same – which isn’t the case. On the flipside false breakouts do occur, which simply means price would break upwards (resistance level) or downwards (support level) beyond the historic points and novice traders jump in thinking the market will continue to move in that direction.
Given that we now understand that trying to predict a trend can be very dangerous for a trader – which off course begs the question “If one can’t predict the market then how are they supposed to trade and make money?”
The answer is “Price Action” keeping a close watch on the current price of a stock is the best way to trade any stock, currency or commodity. Learning to trade price action does require a reasonable level of technical acumen and self discipline, which I would love to discuss in my forthcoming posts.
I would love to hear your questions and comments 🙂