One of the most common mistakes forecasters and investors make when trying to predict the market is looking at the market through the prism of external events and assuming that these circumstances will automatically influence in determining where markets are heading. Global news events usually shape markets, and these stories are far from ironclad indicators to make investments. For example, while a breaking piece of news might be great for American investors, its ripple through the Chinese market might have far more negative consequences. When investors become adamant that they know where markets are going based on what they read or think, it can often spell trouble. Our biases and beliefs are not the basis for sound investment strategies.
When we accumulate information, it tends to make us more confident in our opinions and beliefs. This overconfidence then leads to more daring predictions. This assurance can insulate us from market realities and compel us to bet against prevailing price movements. The truth is that prices move in waves and rather than predict where they will go, it is more prudent to ride the waves and be able to adjust as they move. Not being tied to a specific idea, belief, or prediction makes our ability to adapt and change according to these flows much more straightforward.
If we zoom in from the big picture and take a more focused look at the markets – free from the filter of news and noise – we’ll see that the market has many layers and therefore many resolutions. For most of its trending life, the market is ideal at 80% of the time. Occasionally, a pulse will hit and disrupt that 80%. Smart investors know not to jump at these tremors. The ability to hold firm and whether these blips can often make or break a trader. Jumping at every disruption or market move puts a trader at a very high risk. Instead, a more sound strategy is to watch the movements of the market and make calculated decisions as it goes.
A practical example of how our minds are well built to make short term predictions rather than long term forecasts is why if we suddenly encounter a poisonous spider, we can quickly get out of the way and avoid its bite. However, if someone asks us to guess where in the house the spider will be tomorrow, we will almost certainly pick the wrong spot. In market terms, we can react and adjust to surprises and sudden jolts, but our brains don’t have the programming power to see how a future encounter will transpire.
In addition to not being able to predict the future or see all potential disruptions, there are even present realities that are seen with a level of skepticism. For example, most of the market is trending upwards; this does not mean that an individual stock will necessarily join the wave and increase in value. It is especially true in the short term, where fluctuations of value are seen more clearly. To gauge the health of the stock, take a look at it over a more extended period and in the context of broader market forces and changes. Most importantly, understand that prices rarely move in straight lines for long periods.
There is no viable way to predict with certainty where the market is going, and traders will eventually have to accept this. If your approach to trading is not bound by long-standing beliefs and certainties, you can use your creativity and flexibility to move and adjust to the market.
From this point, it’s important to have a well thought out and strategized confirmation method. It is the process by which a trader uses an additional indicator to substantiate a trend. Many traders feel more secure when they use multiple indicators, further confirming a suspected trend. But as stated before, it is crucial to avoid confirmation bias (tendency to gravitate towards information that meshes with pre-existing beliefs) and to verify independently of your feelings and or opinions.
The bottom line is, the market is a constant unexpectable arena where anything can happen. Traders need to be smarter, flexible, and adaptable. Traders need to spend time developing and perfecting their strategy skills. Whenever you work by confirmation, it will also help to contain and lower your risk. Wait for the market to show you’re right and resist the urge to respond to your gut impulsively.
In contrast to this article, reading this article called “Lower Risk Trading is More Profitable Than You Think!”
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