The Unknown Future: To Predict or Not to Predict

[firewalker 10]

this discussion on prediction and who can be the closest has very little to do with trading or making money

 

This is something I already pointed out during the posts in this thread.

But no one is obliged to participate if they think the topic isn't interesting enough

 

professional traders have no clue where the mrkt is going they just react l

 

Depends on how you define 'professional'. I've seen some people have a surprisingly good clue about where the market is going...

[BlowFish 10]

I wonder if I might ask something of the predictors? Using your favourite instrument, perhaps you could tell me mondays high and low and what time they will be put in?

 

Thanks, appreciate it :)

[firewalker 10]

I wonder if I might ask something of the predictors? Using your favourite instrument, perhaps you could tell me mondays high and low and what time they will be put in?

 

Thanks, appreciate it :)

 

I'm not sure who 'the predictors' are, but I take it you are talking about the people who voted option (1)...

 

Like I said at the start of this thread, I'll try to play the 'moderator' of two different sides, trying to stay neutral and open to both sides as we go along.

 

Therefore I think it's important to keep in mind james_gsx' remark:

"I voted Yes, all is known in advance. That doesn't mean anyone knows what it is..."

 

I'm under the impression that the majority of those who voted (1) did so, not on the basis of empirical evidence but rather on the basis of a belief. This is not so much a criticism as it is an observation.

 

Of course anything that may help support a certain case, is welcome

[BlowFish 10]

Ahh beliefs, there is an interesting topic, but one for another thread.

 

If a tree falls in the forest but no one hears it, does it really fall? If the market is predictable but you can not predict it, it may as well be that tree in the forest i.e. un predictable from the point of view of trading. I am surprised there are so many that believe markets are predictable to be honest.

 

Predict - to declare or tell in advance; prophesy; foretell. Trading an edge is not predicting. Anticipating is not predicting (I guess I am an 'anticipation' trader btw) S/R and trading price action off of it is not predicting. Thinking a market is over bought or over sold so trading an anticipated reversion to some sort of mean is not predicting.

 

Actually there are fairly few methods that lend themselves to prediction. Geometric based approaches can, Cycle stuff, Astro (which most thing is for fruitcakes!) Neural nets, those are the ones spring to mind.

 

Funnily enough my girlfriend threw a surprise party for me yesterday and one of the guests was an old trading buddy. He is one of the few traders I know who is 'prediction' orientated. He gave me a chart with S&P turning points (time only) for next week, along with a CD with some of the work he's doing currently. He used a kind of hybrid cycle geometry math approach. He was quite excited as its been remarkably accurate in his testing.

 

Luckily it isn't necessary to predict to extract money from the market thought that's not what's under discussion.

[firewalker 10]

Ahh beliefs, there is an interesting topic, but one for another thread.

 

If a tree falls in the forest but no one hears it, does it really fall? If the market is predictable but you can not predict it, it may as well be that tree in the forest i.e. un predictable from the point of view of trading. I am surprised there are so many that believe markets are predictable to be honest.

 

I too had not expected so many people to vote for option (1), perhaps it would be interesting to explore what reasoning is behind these choices?

 

Predict - to declare or tell in advance; prophesy; foretell. Trading an edge is not predicting. Anticipating is not predicting (I guess I am an 'anticipation' trader btw) S/R and trading price action off of it is not predicting. Thinking a market is over bought or over sold so trading an anticipated reversion to some sort of mean is not predicting.

 

I agree.

 

Actually there are fairly few methods that lend themselves to prediction. Geometric based approaches can, Cycle stuff, Astro (which most thing is for fruitcakes!) Neural nets, those are the ones spring to mind.

 

True, which I why I mentioned some examples of what people would denote as 'predictive systems' in posts #2 and #3. It seems that a lot of people think or believe that seemingly unrelated external factors (lunar cycle for example) have an effect on the stock market, but are unable to do anything with that belief. I'm being pragmatical about all of this. Ask people why they believe in God. I suspect a majority does so because it helps them solve some metaphysical issues and gives them an easier answer. This is not meant to be offensive in any way or towards any form or religion or belief

 

Funnily enough my girlfriend threw a surprise party for me yesterday and one of the guests was an old trading buddy. He is one of the few traders I know who is 'prediction' orientated. He gave me a chart with S&P turning points (time only) for next week, along with a CD with some of the work he's doing currently. He used a kind of hybrid cycle geometry math approach. He was quite excited as its been remarkably accurate in his testing.

 

Well, that's the kind of predicting we are talking about. Does anybody here use any of these 'tools'? To what extent does it 'work'? Let me know how the cycles turn out this week

 

Luckily it isn't necessary to predict to extract money from the market thought that's not what's under discussion.

 

Indeedo.

[Bearbull 10]

FW,

If anybody can predict the prices on a consistent basis, he or she would not be posting here but buying up Islands in the pacific;)

 

As for belief, it is personal and has got nothing to do with reality. Einstein did not believe in the ramifications of Quantum Mechanics, what did that prove, Einstein was wrong.

 

As for belief in GOD, well first one has to define with clarity what one means by "GOD";)

[myrtleturtle 10]

I chose [2] as it seemed the more logical.

option[3] seemed too bizarre, and doesnt explain why some funds and banks have remained in business for so long.

 

option[1] seemed to imply that the markets have a clockwork nature to them.

 

so, being a good Goldilocks I chose the middle one.

 

These discussions are always going to get bogged down in semantics since you have to define how you quantify "known in advance". almost by definition, it implies never making a duff call.

the middle option, as already explained by others, is that edges can be found whereby not knowing doesnt stop you from making money.

 

but, I suspect, not nearly enough if you know "in advance".

 

my take on it is "pivotal moments", or "there are tides in the affairs of man, which, if taken at the flood, lead onto great fortune", where I think Sup/Res possibly comes into its own.

 

Their are price points, Sup/Res, which either re-inforce a sentiment, and act as Sup/Res, or if broken, changes sentiment, causing major movements. This big-move from small-zone gives rise to the belief its known in advance.

 

I dont think anyone can say, in advance whether a given Sup/Res will hold/break.

However, you can play retracements/pullbacks with some confidence. unfortunately, its not me.

also, given a big enough stop-loss, "known in advance" loses meaning.

 

so, lots of definitions need clarifying. (how many wrong calls can you make and still say you know in advance? how stops are calculated. if you get stopped out, and the market goes in your deirection, is that a success because you called the direction, or a loss cos you got stopped out?)

sorry about being pedantic, but definitions would be a starting point to have a framework within which to quantify things.

phew, thats a lot of typing for a Monday morning.

[BlowFish 10]

Fair enough BB but if your beliefs are close to 'reality' you are much likely to to do better than if they are not. That's just my opinion which is based on a belief anyway:) Some people believe things despite compelling evidence to the contrary. This is likely to adversely effect an individuals trading.

 

 

I think a core belief in predictability might lead to some nasty trading issues. For example 'grailittis' (if you can not reliably make those predictions lets find a method that allows it). Or numerous psychological issues, e.g. if the market is predictable then any loosing trade is simply a result of you not being able to predict well enough.

 

As to consistently predictable well you only need to make one or two predictions, but almost by definition they must be consistent. I imagine some believe that the market is predictable just not all the time? Personally I think the market has tendencies which is a different thing. Believing that something is predictable based on tendencies is dangerous imho.

[wasp 10]

To what degree do you mean?

 

I can say GBPJPY is going to hit the 213.50 region before it will hit 209 but do you want the exact pip and/or every swing in between?

 

getting there............

[firewalker 10]

PURE WYCKOFF: Learn to aniticipate THE IMMEDIATE FUTURE with the info. in front (within the context of previous price action (NOT PREDICT), this then allows room for adopting a flexible mindset, ability to discern changes in supply/demand pressure on an ongoing basis and go from a bullish to bearish & vice versa , stance without hesitation.

 

Bearbull, it seems that even Wyckoff did some forecasting of his own:

 

"Further development of this method of judging the market from its own action resulted in my using it as a basis for predicting the probable course of the market, and this eventually led to my issuing weekly, “The Trend Letter” (first published in 1911) which had a most successful career for many years. In fact, the forecasts contained in this Letter were so accurate that a large following was developed."

 

FW,

If anybody can predict the prices on a consistent basis, he or she would not be posting here but buying up Islands in the pacific;)

 

Probably, although on the other hand, one wonders sometimes why highly successful traders would want to hang around a trading forum...

 

As for belief in GOD, well first one has to define with clarity what one means by "GOD";)

 

I guess that would be topic for another type of forum

[Bearbull 10]

Well, Wyckoff obviously had an uncanny abilility to ascertain with great accuracy the imbalances of supply and demand and exploit from it. I don't think many here have attainted that status.

 

As for successful traders coming on to trading forums, it is heartening to learn that they do , am sure you have benefited from exchanges with them both here and on other forums. James who started this website I believe is a successful trader. Trading is a lonely business and I know quite a few competent traders who have branched into teaching, mentoring etc to break up the boredom and to maintain contact with the trading world. Nothing wrong with that surely.

[Eiger 10]

I think making predictions pulls the ego in, and that sets us up for difficulties. We all seem to admire the Gann-like predictions of stating the high or low within an eighth. Wouldn’t it be great if we could do that? Wouldn’t we be great! If anyone actually can do it, we put them on a pedestal and make them into a trading hero. When I think carefully about this, though, I see the ego emerging. If I can make a prediction and be right, I must be great. I think, too, that it flies in the face of trading as an enterprise based on probabilities.

 

Here’s a question. Which seems more compelling or appealing, A or B:

 

A. I can predict the high and the low consistently within a few ticks.

B. When the birds stop singing and the sky darkens, it’s probably going to rain.

 

Most of us would probably chose A, even though we know in our heart-of-hearts that B is the better answer for trading the markets (unless of course, we happen to be Gann ). I think we choose A because it reflects what psychologists call ego-syntonic. It stokes the ego because it places “I” in the driver’s seat (“I predict”), and the ego likes that. In B, there is no I. The birds are driving the bus. Not too appealing to the ego.

 

Other things operate that make it less likely that we would chose B. From behavioral finance, for example, we know that people in general ignore base rates, or the probability of some event. The researchers in this area discovered that most people will ignore probabilities in favor of familiarity, salience, and other non-probabilistic features, even when they know probabilities are important. Preferring other—and often unrelated—explanations for things, we naturally don’t think in terms of probabilities.

 

There was a relevant study in behavioral finance that created a simulated trading environment and had groups of people trading a variety of things. Just before trading, some people’s egos were mildly challenged. Although the ego challenges were randomly assigned, these people traded consistently worse than persons who were not challenged. Apparently, protecting the ego was more important than good trading outcomes.

 

We all know, too, that when the ego is on the line, anxiety goes up. I think most people would say that choice A is more stressful than choice B, other things being equal. When stress rises, our cognitive abilities plummet. We miss obvious things and tend to make poor choices. The most recent research is showing that poor outcomes related to stress is due to a focus on internal thoughts and sensations. When we are under stress, our cortical activity increases and in a very real sense, our focus shifts from what’s happening in the market to what’s happening with us, though we may not be fully conscious of this at the time.

 

I always liked David Mathys’ (prior training director at Wyckoff/SMI) idea that it is better to anticipate than to predict. Prediction has a hard edge to it. You are either right or you are wrong. Anticipation has a less hard edge. You can be more open to possibilities, such as base rates and the probability that the trade won’t work out. I think you are also more open to what the market is saying because it is a less stressful posture. Anticipating the rain by noticing that the birds stopped singing, rather than predicting it will rain is what Mathys was advocating for trading.

 

I used to trade Wolfe Waves with another trader. He was an excellent trader and was very successful trading just this one pattern. But it wasn’t because he could identify the buy and sell waves; a little training and anyone can do this. His success was due to his attitude towards his trades. He would put a trade on and then always say, “Now it’s up to the market to decide.” This was his mantra, and he always made a point of saying this. He acted very much like choice B: He anticipated a change in direction, and then let the market drive the bus. He was able to let the trade outcome and his ego go. Few of us seem to be able to do this. Maybe this is why many of us find trading so difficult.

 

Eiger

[MC 10]

Eiger...B is incredibly well likened to the markets most profitable approach.

Good analogy.

 

And the rest was good food for thought as well.

[ammo 10]

i've never seen a magic wand that u could wave to fix your car ,turn water into beer,etc,there is only one way to succeed and learn to trade the markets and that is work,work,work, only thru that exercise u will learn and profit

[firewalker 10]

I used to trade Wolfe Waves with another trader. He was an excellent trader and was very successful trading just this one pattern. But it wasn’t because he could identify the buy and sell waves; a little training and anyone can do this. His success was due to his attitude towards his trades. He would put a trade on and then always say, “Now it’s up to the market to decide.” This was his mantra, and he always made a point of saying this. He acted very much like choice B: He anticipated a change in direction, and then let the market drive the bus. He was able to let the trade outcome and his ego go. Few of us seem to be able to do this. Maybe this is why many of us find trading so difficult.

 

Eiger

 

Thanks Eiger, I appreciate the contribution to this thread. Excellent points.

 

Having mantras as such is a good way of preventing ego having the upper hand of you. It also helps you to stay open to the possibility of the 'truly unexpected' (think of 9/11 and these kind of events).

 

I've found it personally difficult in opening myself to the other side of the trade: when I'm stopped out of a short, in most cases this means the long side comes into play and my stop might have been a very decent long entry. This obviously requires decent backtesting, but it also needs a very flexible mind imo. It helps a lot to think in terms of 'scenarios': if X happens than I'll do A, if Y happens instead, I'll do B.

 

Having a predetermined idea of what the market should do, is a recipe for failure imo. Having said that, it seems that despite the majority voted for option (1), most comments we are getting here seem to be in favour of option (2). Perhaps those who voted for (1), would care to share some of their thoughts and tell us why they see the market as such?

 

i've never seen a magic wand that u could wave to fix your car ,turn water into beer,etc,there is only one way to succeed and learn to trade the markets and that is work,work,work, only thru that exercise u will learn and profit

 

Nobody ever said anything else ammo. Even through history who (reportedly) had the uncanny ability to 'predict' some market moves, admitted they spent hundreds if not thousands of hours studying the market action.

[BlowFish 10]

i've never seen a magic wand that u could wave to fix your car ,turn water into beer,etc,there is only one way to succeed and learn to trade the markets and that is work,work,work, only thru that exercise u will learn and profit

 

Indeed but do you work on 'predicting' what price will do?

[firewalker 10]

Indeed but do you work on 'predicting' what price will do?

 

I think those who work on predicting the future path of the market have a lot more work cut out for them, then those who just wait and anticipate with a plan in their heads.

 

If not, you're just throwing numbers in the air.

[Paul71 10]

Before I go off about this or that concept or idea, let's make clear first that none of this is representative of my own trading, let alone my own personal view about the market.

 

This thread is intended to discuss two fundamentally opposing views:

 

(1) The market is completely predictable and all you need to do is find the right key to decipher its language. But basically the market will do whatever it plans to do, regardless of any 'external influence' or manipulation. In other words, the path of price is laid out in advance.

 

(2) The other one is that the market is unpredictable, but not random. Randomness and unpredictability are not the same, but that's topic for another discussion. The second view is what I think most people would adhere to, and it's also what Douglas says in his "5 fundamental truths": on the one hand "anything can happen" and on the other hand "you don't need to know what's going to happen next, in order to make money of it".

 

Throughout history however, a lot of people have tried to determine what is going to happen next (rather than trade in the moment). Whether or not they were successful and to what extent, is another matter. Everybody knows that from time to time a new method or guru comes along, claiming he has found the secret to the markets.

 

Some people probably have not given the above much thought. Perhaps because they need not have to, and their trading is doing just fine.

 

The more time I studied charts, the more I observed that price moved in a very "orderly" fashion... although there are times where I have no idea what the market is going to do, I still make money by following my plan. On other times, the market acts like if it was destined to this or that. But let's not get into anything too esoteric

 

Thoughts, views, opinions,... all welcome in this thread!

 

 

Morning FW.

 

Thought provoking thread you have here. We don't know how the participants of a market will behave in the future, but we know how they are behaving now and we know how they have behaved in the past...so we have to able to pick up on behaviour and it's effect on price and then how the price is effecting behaviour and so on (circular).

 

Cycles start and end for reasons, so everything is known in advance once a trader has the ability to pin point the start of a cycle, he can then stay on top of the cycle through his/her knowledge of participant activity within the cycle.

 

Just some input.

[firewalker 10]

Morning FW.

 

Thought provoking thread you have here.

 

We don't know how the participants of a market will behave in the future, but we know how they are behaving now and we know how they have behaved in the past...so we have to able to pick up on behaviour and it's effect on price and then how the price is effecting behaviour and so on (circular).

 

Just some input.

 

Thanks for the contribution.

 

It's an interesting about human behaviour... because does it imply that human behaviour hasn't changed over time? Do markets fundamentally move in the same way as they used to do? What about all the trading that's been executed through automated computer systems, without human intervention? Does it affect the way the market moves?

[Paul71 10]

Thanks for the contribution.

 

It's an interesting about human behaviour... because does it imply that human behaviour hasn't changed over time? Do markets fundamentally move in the same way as they used to do? What about all the trading that's been executed through automated computer systems, without human intervention? Does it affect the way the market moves?

 

 

It's interesting about how it's all really fuelled. Think about one single person and how much they actually pay into the system, the markets, by way of pensions, mortgages, savings, borrowing etc. Then thier use of commodities, where they work, what thier job is for any particular company, thier earnings for what they produce and so on.

 

I suspect the real dumb money doesn't even know that they are dumb money and have no direct interest in the markets such as being an active speculator.

 

Again, just some thought.

[Paul71 10]

People are up in arms around the world over high fuel prices...they have to pay for thier investments...they think their pension is just money that pops up out of thin air...the dumb money pays for itself the pros just move the money according to what the dumb money wants or maybe doesn't want in most cases.

 

Professional intent must surely be the only thing to pick up on in order to predict.

 

I may be wrong, just some thoughts.

[Eiger 10]

Thanks for the contribution.

 

It's an interesting about human behaviour... because does it imply that human behaviour hasn't changed over time? Do markets fundamentally move in the same way as they used to do? What about all the trading that's been executed through automated computer systems, without human intervention? Does it affect the way the market moves?

 

Human behavior is very slow to change. Much of it is determined by genetics, which take millenia to evolve. Have you ever tried to change a behavior ("habit") you didn't want? Have you ever tried to change your behavior by getting into a new "habit" (e.g., going to the gym routinely)?

 

Even in settings where people have a strong desire to change such as in therapy, change is very difficult to achieve. Psychologists view change as a process that has several stages. Interestingly, relapse (i.e., falling back to old habits) is one of the expected stages of change, and patients frequently cycle through change - relapse - change - relapse before change really sticks. And, that's when people do things conscously. When you think about the mass of human behavior changing - as in trading - it probably isn't all that conscious.

 

When my trading mentor first handed me the Wyckoff text, i thought "How can something written 70 years ago have any relevance to trading today's markets?" Ha! Little did I know. Even with all the changes overs the years in SEC rules, new technologies, arbitrage, new trading instruments, etc, the stuff still works well. Some things have changed, of course, but on balance, it is still an excellent way to trade markets. That's because even with all of the new developments, its human behavior underlying the markets.

 

Here's another way to look at it, as in attempting to aquire new habits. We know that some large percentage (90%+) fail at trading, and many are accomplished professionals and successful businesspersons from other lines of work. The main reason for the high failure rate (I believe) is that trading requires different behavior than the behaviors it takes to be successful in other professions. People just find it too diffiuclt to make the necessary behavioral changes. Human behavior isn't that easily changed.

 

Eiger

[Eiger 10]

People are up in arms around the world over high fuel prices....

 

High fuel prices triggered a thought about change:

 

How in the hell did we in the US elect Bush for a second term!! We knew he was the worst President in an awfully long time. We knew he started the war in Iran without credible reason. We knew he was expanding government and spending faster than than any other president in the entire history of the New World. We knew he literally stole the election. How did we do it again? See how hard behavior is to change?

 

Eiger

[bootstrap 47]

i have seen threads on this topic for years, and have this discussion with fellow traders over beer and a grill almost every weekend.

 

IMHO the truth is somewhere in the middle of unpredictable and random, and the factor that will tilt the needle one way or the other is the time frame traded. The shorter the time frame the more random the markets appear, and the longer the time frame the randomness dies down and only unpredictability remains.

 

But I really don't care. I do not try to predict, I just prepare for the inevitable movement. Be it up, down, or sideways.

[jasont 10]

The main reason for the high failure rate (I believe) is that trading requires different behavior than the behaviors it takes to be successful in other professions. People just find it too diffiuclt to make the necessary behavioral changes. Human behavior isn't that easily changed.

 

I couldn't agree more Eiger. I have found some similarities in other businesses and trading but overall they hold a completely different set of behavioral mentality. Where many entrepreneurs might say remain highly positive and bursting with energy, as a trader I find it better to be balanced positively and negatively with a calm state.

 

IMHO the truth is somewhere in the middle of unpredictable and random, and the factor that will tilt the needle one way or the other is the time frame traded. The shorter the time frame the more random the markets appear, and the longer the time frame the randomness dies down and only unpredictability remains.

 

Bootstrap, do you mind me asking if you trade daily time frames or intra day? The reason I ask is that I find it interesting to see if those who trade daily believe the market is more random shorter term and vice versa for those who trade intra day.

 

I personally am an intra day trader and can see the patterns of the market change much easier in an intra day time frame better than a daily time frame. I have watched both and continue to watch both daily and intra daily. Is it a case of we as individuals see different things at different time frames?

 

PS. I agree that the answer for me lies somewhere in between number 1 and number 2. Hence I haven't put in a vote.