There are plenty of signal services, newsletters, and trading rooms that provide forecasts for the coming days, weeks and months about what the market will do. It is a very tempting offer to give subscribers peace of mind about what will happen in the market. Some believe it is possible to see what the market will do and subscribers follow these services. Unfortunately, there are no predictions even if these advisors are clairvoyants. Nobody can make correct predictions until 50% of the time. Consistently, the market is either going up or down.
When traders predict what the market will do, is it the same as predicting? Prediction is a declaration that something will happen exactly in the future with only one outcome while anticipation is thinking in advance of all possible outcomes. Anticipation requires dealing with problems before they arrive; Forecasting is the expectation that something will happen without dealing with it. Forecasting tends to take a biased position or attitude while forecasting requires careful consideration of what might happen: good or bad.
An example of a forecast is when a trader watches prices rise and approach an old resistance level. It is expected that prices may continue or reverse. He has to make preparations to deal with both scenarios. The first is to be prepared to breakout and continue to the upside, and he has to decide what price he will go far and where his stop loss will be placed. If the prices reverse, he has to determine where to enter the short as well as the stop loss. These scenarios prepare him for the next price action, and anticipate what other traders will do when prices reach the resistance level. If he predicts what prices will do, for example, he goes up and keeps going up. He has no plans for a possible reversal. It only focuses on the uptrend movement and not on a potential reversal or consolidation. These scenarios must be constantly considered and planned as markets are constantly evolving. This mindset makes a huge difference between a successful trader and a losing trader.
Anticipation is a losing game, fueling the need to be right rather than the need to make money. Vanity is often the reason he boasts to other traders how good he is at predicting the direction of the market. In commerce, ego and profitability cannot coexist. If that wasn’t my ego, most traders would look for one trend and then use evidence to support that bias ignoring evidence that might support the opposite. This bias predicts the future. Tend to hold the mentality even after making a trade. It may be a profitable trade, but in the end the trader is so convinced by this bias that when the trade fails, they have no alternative to prepare for the loss.
One of the traits required of a successful trader is their ability to prepare all possible outcomes, and to imagine scenarios that the market might do, up or down, before making a trade. He knows he can’t predict but he can calculate market odds somehow. In anticipating the outcome, he has a plan for one outcome or another. What happens if the market moves against its position, where will it exit? What happens if the market goes in favor of its position, where should it go out to take profits?
Anticipation is the preparation for both outcomes, good or bad. Calculating how much you lose is just as important as how much you expect to win. This means that the trader will mark in the chart where he will see the entry point and the two exit points (stop loss and profit target). By owning this method, he can determine the risk-reward ratio as well as the probability of a trade being successful.
How do we overcome this dilemma? The probabilities can be found by rigorous testing of historical data based on the strategies the trader plans to trade. Finding stats to support his idea that the strategy is working will give him confidence to approach the market and give a mindset to anticipate, not predict, outcomes. One way is to see the market as it appears to us either through price action or via an indicator.
Realize that prices or indicators can change direction at any time. By using statistics to make an informed guess, a trader can find which direction the market is likely to go. But probability does not guarantee the desired result. This means that a back-up plan, i.e. a stop loss, must be put in place in case the desired result does not occur. This is why successful traders have a stop loss. The stop loss is a critical factor that determines whether 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 with the market and going with the flow.