Trading Success – Predicting the Unpredictable

A very small percentage of people who unsubscribe from my email newsletter take the time to advise me of their reasons why. This effort on their part is very much appreciated, as it allows me to see in some cases where I need to focus future articles.

Last week, one of the unsubscribe emails contained the following single line reasoning: 

  • “I can’t predict the unpredictable”

 

Now, I must start with a disclaimer to the effect that I have not communicated with that person beyond their statement; it’s not appropriate considering the act of unsubscribing is in part a request for no more communications. As such, any of the following discussion in relation to their intent and meaning is based purely on speculation.

That being said, it does appear to be a common statement from those struggling to find their way in this game of trading.

“I can’t predict the unpredictable”.

There are a couple of problems with this statement.

Firstly, there is an underlying assumption that markets are unpredictable. While it’s understandable for a trader to form this conclusion having worked so hard to unlock the code of the markets with little success, it’s not entirely correct.

While it’s not possible to forecast future market action with 100% accuracy every time, it’s also not entirely random. Proper application of market analysis will allow you to identify market biases, which will provide you with an edge when combined with effective money and risk management.

As we discussed in the Rock, Paper, Scissors article, this game of trading is not so much about price, but rather about determining the future actions of other market participants. If we know their likely actions, we can position ourselves to profit from the resultant orderflow. Future actions of individual traders may be unknown, but with experience you’ll learn to identify places on the chart at which the masses are most likely to take action. In particular, at areas where they’re suffering drawdown and operating under extreme stress.

The main problem in the statement though is with the word ‘predict’

www.dictionary.com states that to PREDICT is usually to foretell with precision of calculation, knowledge, or shrewd inference from facts or experience.

While this implies a potential for error, I suspect that the reality is that most people are searching for certainty, rather than learning to deal in probabilities.

At a rational level, they know that this is a probabilities game. But at a deeper level, we do not operate well in an environment of probabilities – people crave certainty and will go to desperate lengths to find it.

Mark Douglas said it best in The Disciplined Trader

“Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt.”

In the market environment where certainty does not exist, these people will typically end up quitting out of frustration. Very few will persist to the point where they are finally forced to learn to operate in an uncertain environment.

It’s the difference between seeking certainty and managing probability and risk. Net long-term losers are typically seeking certainty in the markets. Net long-term winners have learnt to manage probabilities and risk.

So, if you’re trying to predict the unpredictable, stop it. You’re taking the wrong approach.

Identify a market bias; identify areas where order flow is likely to occur in the direction of the market bias; confirm the setup area provides a suitable risk:reward ratio and provides a technical place to put a stop which invalidates the trade premise, and then work the best entry you can within that area.

While at some level we are forecasting or predicting future market direction, we are in no way seeking certainty. We have simply identified opportunity and so act to take advantage of that opportunity, while managing risk in case this is one of our many losers. We can’t know in advance which of our trades will be winners and which will be losers. So, we accept either outcome, entering the trade and managing the risk.

It’s not about seeking certainty. It’s not about predicting the unpredictable. It’s about identifying opportunity and managing risk.

Lance Beggs

 

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YourTradingCoach - Admin

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