Monday, January 29, 2007

The Folly in trying to Predict the Market

At least once a week I get an email or a question from a fellow trader on the forums I frequent (Elite Trader, Trade2Win, Kreslik, Currensys) asking the inevitable question...

Tedders, "So where do you think the such and such market is going?" When this happens, I'm reminded (yet again), that each and every newb in the markets must seek - THE HOLY GRAIL.

"A Grrraiilll, you say?", I reply with exasperation. And then, after an long sigh, I shrug my shoulders and reply,"Gee, whiz I have no idea but I know you'll make some money if you just stick to your trading plan".

Yet this does not faze them. Oh, no. In fact 9 times out of 10 (and without missing a beat) they launch into why their Fibonacci levels or Murray math or Mystic moon phase will inevitably dicatate the path that the market must follow. The Pound will go to 3.0000, the Russell will go to 1000.00 and all will be well with the world.

Now occasionally the stars line up just right and one of these folks does indeed predict a market move accurately and then they rejoice. Even a blind man can occasionally find a candy bar. But eventually, they simply fade away looking for yet another "perfect" way to predict the markets.

Now some of you have doubtless guessed at what the 2 distribution graphs are at the top of my webpage. They are statistical distributions. One graph is purely random, the other is the Russell 2000 index. See the difference? :)

Most of the market is noise. Most proven trading methods rarely win better than 65:35 (and many far less than that). You don't need to know where the market is going. You do need to wait for the opportune moment to arise and then act.

And the only way that you can do this is if you have PLAN! It doesn't have to be complicated (simple is better), it doesn't have to be brilliant, or original, or anything else except two things: 1) it must make more money then it loses, 2) you must be comfortable trading it. It's that simple.

Now many of you are undoubtedly saying to yourselves, "How is this possible? After all you are either on the 'right' side of the market or the 'wrong' side." And I would say that is indeed true, but not in the way you may think it is. The "right" side is simply trading your plan - the "wrong" side is having no plan or disregarding your plan.

A good example of this was illustrated this morning on the Russell by Dr. Brett Steenbarger (TraderFeed) and myself. Dr. Steenbarger had a short bias all morning based on what his analysis and plan told him. He traded the Russell successfully (i.e. he made money).

I on the other hand had a long bias all morning due to the analysis and what my plan told me. I also made money on the Russell this morning and hence was successful. Both of us traded the same period (roughly) from market open to about 10:30 am (EST).

So how important is "predicting" the market? I'd say not very. But you won't listen anyway until you're ready. Good luck.
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1 comment:

Anonymous said...

Stock Tip Trading

Before you embark upon a journey of trading stocks or futures, and before you make any trades, you MUST determine and establish your risk level. Traders that fail to do this are usually doomed from the start. The fact is that most trading accounts that go bust are because of the failure to determine at what point the trader will cut their losses and move on to the next trade. Rookie traders are particularly prone to do this. They hang on to losing positions hoping that they will turn around - only to watch the price drop even further. Too much thought and effort are expended on the buying decision instead of the selling decision. The sad truth is that it's the selling decision that will determine your fate as a successful trader. And successful trading is dependent on how long and how well you can protect your account against loss until the big profit comes your way. Setting a risk level for your account and for your trades will provide such protection.