There are lots of signal services, newsletters, and trading
rooms offering predictions for the coming days, weeks and
months ahead on what the market is going to do. It's a very
tempting proposition to give subscribers a peace of mind on
what the market is about to happen. Some believe it is
possible to see what the market will do and subscribers do
follow these services. Unfortunately, predictions don't
exist even if these advisors are seers. No one can make the
correct predictions even 50% of the time consistently,
market is either goes up or goes down.
When traders anticipate what the market will do, is it the
same as prediction? Prediction is declaring something will
happen exactly in the future with only one outcome while
anticipation is to give thought in advance to all possible
outcomes. Anticipation requires dealing with problems
before they arrive; prediction is expecting something to
happen without dealing with. Prediction tends to take a
bias or position while anticipate requires careful thought
of what might happen: good or bad.
An example of the anticipation is when the trader is
watching the prices rising and approaching an old
resistance level. He anticipates that the prices may either
continue or reverse. He has to make preparations to deal
with both scenarios. One is to prepare for the breakout and
continue to the upside, he has to determine at which price
he will go long and where the stop loss will be place. If
the prices reverse, he has to determine where the short
entry will be as well as the stop loss. These scenarios
prepare him for the next price movements, anticipating what
other traders will do when the prices get to the resistance
level. If he predicts what prices will do, say, has been
going up and continue to go up. He has no plans for the
possible reversal. He is focused only on the uptrend move
and no on the possible reversal or the consolidation. These
scenarios must be constantly considered and planned as the
markets continually evolve. This mentality makes a
tremendous difference between a successful trader and a
losing trader.
Predicting is a loser's game, feeding the need to be right
instead of the need to make money. The ego many times is
the culprit to show off to other traders how good he is at
predicting the market direction. In trading, ego and
profitability cannot co-exist. If it's not ego, most
traders will look for one direction and then use evidence
to support that bias ignoring the evidence that may support
the opposite direction. This bias is predicting the future.
It tends to carry the mindset until after the trade is
made. It may be a profitable trade, but eventually the
trader is so convinced of this bias that when trade fails,
he'll have no alternative in preparing for the loss.
One of the desired traits of a successful trader is his
ability to prepare of all possible outcomes, imagining the
scenarios the market may do, up or down, before the trade
is made. He knows he cannot predict but he can calculate
the probabilities of the market going one way or another.
In anticipating the outcome, he has a plan for one outcome
or another. What happens if the market goes against his
position, where will he exit? What happens if the market
goes in favor of his position, where should he exit to take
profit?
Anticipating is preparation for both outcomes, good or bad.
Calculating how much to lose just as important as how much
to expect to win. This means the trader will identify in
the chart where he'll see the entry point and two exit
points (stop loss and profit target). By having this
method, he can identify his risk-to-reward ratio as well as
the probability of the success of the trade.
So how do we overcome this dilemma? Probabilities can be
made found through rigorous testing historical data based
on strategies that the trader plans to trade with them.
Finding statistics to back his notion that the strategy
works will give him confidence in approaching the market
and give the mindset to anticipate and not predict the
outcomes. One way is the see the market as it is showing
us either by the price action or by indicator.
Recognize that prices or indicator can change direction at
anytime. By using statistics to make an educated guess, the
trader can find which direction the market will likely go.
But probability cannot guarantee the desired outcome. This
means a backup plan must be in place, i.e. a stop loss, in
case that desired outcome doesn't happen. This is the
reason why successful traders have stop loss in place. A
stop loss is a deciding factor that determines if the
outcome has worked or not. The trader must accept that the
market will always be right and trying to be right will
prevent the trader from being one with the market and go
with the flow.
----------------------------------------------------
Larry Swing is the President of the popular day and swing
trading site http://www.mrswing.com/ a place where you can
find free daily articles and videos covering education,
market analysis and picks from Larry and other well known
traders in the industry.
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