The Sin of Predicting and Anticipatory Trading

[Do Or Die 10]

There are basically two types of traders- anticipatory and reactionary. It is important to understand which type you are to avoid the sins of prediction. The meaning of anticipation, prediction and forecasting may seem just overlapping but understanding each approach can save you a LOT of time and effort.

 

In Prediction the probabilities are absolute. You cannot predict something with probability 0.98. You predict it correctly or not, that is. Prediction is for fortune tellers, psychics and tarot readers. Prediction is NOT for traders. So if someone claims about predicting top/bottom you know that he is inflating ego to compensate for the lack of trading skills. Stay away from such people, which include many trading gurus.

Forecasting is more of a scientific term. An error and probability is always associated with forecasting. There are lots of trading systems which base their trades entirely on forecasting future price moves. They may work or may not work, similar to a group of traders who may or may not make money.

 

Now let’s come back to the basic two categories- anticipatory and reactionary trading. A reactionary trader is someone who identifies a price behavior rule, letting price confirm his thesis and playing the move after it has taken place, hoping for follow through. An anticipatory trader is someone who uses a premise to identify potential moves ahead of time and take a position before the price confirms this move.

 

In reactionary trading you simply ride the NOW wave, while in anticipatory you bet on future price movements. A good example of reactionary trading is daytraders who trade on price discrepancies (scalpers). Someone trading with Elliott waves will is an example of the latter type. Similarly trend following systems are an example of reactionary trading while trend-exhaustion based systems are example of anticipatory trading.

 

Some people hold that all type of trading is anticipatory, others that it is reactionary, and still others who say that it all depends on the way a strategy is defined.

 

Trading systems which are built using data mining or machine learning are by default reactionary. They tend to fail horribly at outliers (unusual market events).

 

There are some factors which determine your trading style:

• Your temperament
  
• Right brained vs left brained (arts vs mathematics background)
  
• Experience level
  

 

People who venture into trading first must learn just what style fits them the best, and follow it. Jumping from one form to another at initial learning stages can waste a lot of effort. It's important to understand your time frames and take a real assessment of just how much risk/time you will have to devote to your trading.

 

Lets take the example of AAPL on daily time frame. It showed a distinct trading range compression a month ago.

 

 

 

Reactionary trading: The trader will watch the setup develop and wait every day *patiently* for a breakout. Each day place a stop-buy order at a level on which a breakout will be confirmed. A beginner reactionary trader would have very likely shorted at downside breakout in mid-June, and then reversed trade at end of June.

 

Anticipatory trading: The trader will anticipate the direction of breakout during the consolidation phase itself. The trade will be initiated during the consolidation phase; buy near the bottom range of channel or short near the upper range of the channel. If the initial trade is a loser the trader will not reverse trade because doing so involves a ‘reaction’.

Combination approach: The traders buys (shorts) in small quantity in anticipation of the direction of breakout during the consolidation phase. Then add to existing position if the breakout is in favorable direction or take a new position if the breakout comes in opposite direction of initial trade. This approach requires more skill and experience.

 

 

Posting a comment will only take you 2 minutes, but it will be the strongest motivation for me to share something better.

[Tradewinds 12]

Good analysis. You have put into words, and defined something very basic to trading. I have been struggling with which of the two methods to use, anticipation or reaction. I really like the suggestion of the combination approach. In my "Black and White" thinking, I was focusing on one or the other.

 

When I anticipate, I tend to make better decisions, and have time to analyze what is really going on. When I'm in reaction mode, things can quickly degrade into chaos. In reaction mode, I start micro managing, stare the the price, and loose track of what is really going on.

 

Again, I've been struggling with these two perspectives, and feeling very conflicted between the two. I've practice traded both styles, but have not consciously defined, or been aware of my behavior to the degree that you describe in the article. Now I can define and recognize what I am doing, and be aware of what "mode" I'm in. Sometimes I switch back and forth, or degrade from anticipation to reaction.

[SIUYA 11]

nice thread, if i may add two points......

 

Trading systems which are built using data mining or machine learning are by default reactionary. They tend to fail horribly at outliers (unusual market events).

 

I would disagree with this in that long term trend followers who are reactionary often do well in times of unusual market events as many unusual market events have their biggest moves at the end of previously existing trends (think market bubbles, or collapses), and so they do very well here - however yes you are right that they often then have periods of drawdown at the end of these - but these are not true outlier events, merely the natural course of the markets.

Small point I know but you cant throw the baby out with the bathwater

 

Reactionary trading: The trader will watch the setup develop and wait every day *patiently* for a breakout. Each day place a stop-buy order at a level on which a breakout will be confirmed. A beginner reactionary trader would have very likely shorted at downside breakout in mid-June, and then reversed trade at end of June.

 

Anticipatory trading: The trader will anticipate the direction of breakout during the consolidation phase itself. The trade will be initiated during the consolidation phase; buy near the bottom range of channel or short near the upper range of the channel. If the initial trade is a loser the trader will not reverse trade because doing so involves a ‘reaction’.

Combination approach: The traders buys (shorts) in small quantity in anticipation of the direction of breakout during the consolidation phase. Then add to existing position if the breakout is in favorable direction or take a new position if the breakout comes in opposite direction of initial trade. This approach requires more skill and experience.

 

.[/i]

 

 

you forgot about three others - the coin flippers, those that try and fade every move anticipating tops and bottoms, and those that come late to the party trying to be reactionary and buy the tops after the big moves have occurred...

[Do Or Die 10]

nice thread, if i may add two points......

 

I would disagree with this in that long term trend followers who are reactionary often do well in times of unusual market events as many unusual market events have their biggest moves at the end of previously existing trends (think market bubbles, or collapses), and so they do very well here - however yes you are right that they often then have periods of drawdown at the end of these - but these are not true outlier events, merely the natural course of the markets.

Small point I know but you cant throw the baby out with the bathwater

:doh: I did'nt say that about trend followers... only about systems built on 'data mining and machine learning'.

you forgot about three others - the coin flippers, those that try and fade every move anticipating tops and bottoms, and those that come late to the party trying to be reactionary and buy the tops after the big moves have occurred...

I'm talking about two BASIC categories. In that context you can even add people who trade on rumors, people who get a 'high' from betting.....

[steve46 12]

Again we have a lot of urban myth being posted as good advice.

 

The problem if there is one, is that there is some truth to the commentary...as with most similar comments...it is a matter of perspective....perhaps I can help those who have the ability to think critically about this subject...

 

First, learning to anticipate and prepare of opportunities is critical to my success, and in my class I teach students to anticipate (in fact we anticipate a very nice opportunity Sunday evening). Without the ability to properly characterize market activity and anticipate the likely result from one day to the next, you are at a disadvantage with respect to other properly prepared professionals..(how much of a disadvantage is subject to debate of course).

 

With regard to prediction, of course no has a crystal ball, however at some point, if one survives long enough, it is possible to not only evaluate events in terms of probabilities, but on occasion to in effect "predict" future events with good accuracy...I am sure my students would say that they see me do this almost every day....

 

Finally, it occurs to me that to an observer with little or no natural talent or limited experience, it may look as if a trader is anticipating and predicting events....(I hope not to insult since one can be successful either way), however from that perspective almost everything a really talented person does may seem improbable or even impossible (for those who play golf, look at what Tiger Woods was capable of at times)....

 

Good luck folks

Steve

Edited August 7, 2011 by steve46

[Do Or Die 10]

Glad it helped you...

Good analysis. You have put into words, and defined something very basic to trading. I have been struggling with which of the two methods to use, anticipation or reaction. I really like the suggestion of the combination approach. In my "Black and White" thinking, I was focusing on one or the other.

 

When I anticipate, I tend to make better decisions, and have time to analyze what is really going on. When I'm in reaction mode, things can quickly degrade into chaos. In reaction mode, I start micro managing, stare the the price, and loose track of what is really going on.

 

Again, I've been struggling with these two perspectives, and feeling very conflicted between the two. I've practice traded both styles, but have not consciously defined, or been aware of my behavior to the degree that you describe in the article. Now I can define and recognize what I am doing, and be aware of what "mode" I'm in. Sometimes I switch back and forth, or degrade from anticipation to reaction.

 

You can 'paper trade' the combination approach on charts by assuming a max trade size of 10 units. It may seem complicated initially, but worth it, because it can smoothen your equity curve dramatically. I have put some possible scenarios in the AAPL example here, but it will precisely depend on your trading technique.

(click on pic to enlarge)

[Do Or Die 10]

Again we have a lot of urban myth being posted as good advice.

The problem if there is one, is that there is some truth to the commentary...as with most similar comments...it is a matter of perspective....perhaps I can help those who have the ability to think critically about this subject..

OK I'm game now. Back up sufficient evidence on the myths or back off from such bias. Unlike you, I do not want to shout about my professional experience, but I do love criticism.

 

First, learning to anticipate and prepare of opportunities is critical to my success, and in my class I teach students to anticipate (in fact we anticipate a very nice opportunity Sunday evening). Without the ability to properly characterize market activity and anticipate the likely result from one day to the next, you are at a disadvantage with respect to other properly prepared professionals..(how much of a disadvantage is subject to debate of course).

I'm not talking about your perspective. Take a break from teaching and work on a large trading floor- you will understand what I'm saying.

With regard to prediction, of course no has a crystal ball, however at some point, if one survives long enough, it is possible to not only evaluate events in terms of probabilities, but on occasion to in effect "predict" future events with good accuracy...I am sure my students would say that they see me do this almost every day....

Please read critically before trying to help people with critical thinking. Try to understand the difference between prediction, anticipation and forecasing.

Finally, it occurs to me that to an observer with little or no natural talent or limited experience, it may look as if a trader is anticipating and predicting events....(I hope not to insult since one can be successful either way), however from that perspective almost everything a really talented person does may seem improbable or even impossible (for those who play golf, look at what Tiger Woods was capable of at times)....

Too theoretical, I do not want to discuss this.

[Tradewinds 12]

The problem if there is one, is that there is some truth to the commentary...as with most similar comments...it is a matter of perspective....perhaps I can help those who have the ability to think critically about this subject...

 

God has the absolute truth. The rest of us have partial truths. Wisdom is when a person is willing to admit that they don't have the absolute truth. For someone to think that they have the whole truth, would be for them to consider themselves "godlike".

 

Sometimes, when a really good things comes along, word spreads, and people flock to the source of the good thing.

[jackb 10]

God has the absolute truth. The rest of us have partial truths. Wisdom is when a person is willing to admit that they don't have the absolute truth. For someone to think that they have the whole truth, would be for them to consider themselves "godlike".

 

Sometimes, when a really good things comes along, word spreads, and people flock to the source of the good thing.

 

And yet you assume to know the truth about some god having the absolute truth. That makes no sense at all. Per your logic, you are acting "godlike".

[Diesel10 10]

Bottom line, Want What the Markets Wants!

It's a lot easier to float down the Mississippi River than swim up it against the current. Picking tops and bottoms is for losers. Identify a strong trend, jump on board and place a protective stop at that point where your thesis is disproved. Then trail the stop up until the trend changes and you're out. Simple.

[steve46 12]

Just to put things in perspective..

 

I make a living picking tops and bottoms...I do it every day....and my point is that professionals are able to do what amateurs can't....its always been that way, and probably always will be...

 

and by the way I do it in front of my students, who by and large feel the same way as most of the people here....at first they don't believe it...and they simply ask "how did you do that" and by the 2nd week, they understand that it takes hard work, preparation and the ability to manage risk...in other words, there's no magic to it....

 

Since I have no intention of getting into a seminar on how this is done. I will short cut the questions and say the following....There are two ways to learn how to do this....one is to simply watch and eventually if you have the aptitude for it, you can see clues as to where a market is likely to stop and reverse....the second way (most skilled professionals combine these two methods) is to learn to read the tape....again it takes time and patience but once you learn it, then it is like a walk in the park...you can see where the momentum of the market slows, you can see when the bid holds and when it doesn't hold and price is going to move through a key reference area....if you do it long enough and you have the proper resources it is no different than any other profession....there are people who do it well and those who do it badly (and they don't last long)....

 

Good trading to all

Steve

[umfan92 10]

And yet you assume to know the truth about some god having the absolute truth. That makes no sense at all. Per your logic, you are acting "godlike".

 

It seems you prefer to get into a debate about religion, and that's not what we're here for. Clearly, Tradewinds was just trying to say that no one really knows the truth, therefore whoever is telling you they know everything, is lying to you. If you can't figure that out for yourself, why are you so quick to insult?

 

Steve46,

 

You replied to this thread with nothing but criticism and telling everyone how awesome you are that your students observe you "predict" every day. No one really wants to hear that. Rather than just criticize, I invited you to contribute.

 

 

With regard to prediction, of course no has a crystal ball, however at some point, if one survives long enough, it is possible to not only evaluate events in terms of probabilities, but on occasion to in effect "predict" future events with good accuracy...I am sure my students would say that they see me do this almost every day....

 

Steve

 

You can call it whatever you want, but this is basically what Do or Die was saying. For what reason did you put quotes around the word "predict"? Is it because you are saying that it isn't 100% accurate? Exactly. That is what I interpreted from Do or Die's post. To anticipate is less sure than to predict. You said the same thing as Do or Die with different words.

 

Just to put things in perspective..

 

I make a living picking tops and bottoms...I do it every day....and my point is that professionals are able to do what amateurs can't....its always been that way, and probably always will be...

 

and by the way I do it in front of my students, who by and large feel the same way as most of the people here....at first they don't believe it...and they simply ask "how did you do that" and by the 2nd week, they understand that it takes hard work, preparation and the ability to manage risk...in other words, there's no magic to it....

 

 

Steve

 

If you make such a great living trading, why must you teach? You must be making millions by trading every day! Are you so generous that you willing teach for free? If so, then teach us here on this forum. If not, I will take it that you are not so skilled in trading and you need to teach to supplement your income.

 

You have contributed nothing to this thread, except for your arrogant posts about how your students observe you being so awesome at trading.

 

 

Since I have no intention of getting into a seminar on how this is done. I will short cut the questions and say the following....There are two ways to learn how to do this....one is to simply watch and eventually if you have the aptitude for it, you can see clues as to where a market is likely to stop and reverse....the second way (most skilled professionals combine these two methods) is to learn to read the tape....again it takes time and patience but once you learn it, then it is like a walk in the park...you can see where the momentum of the market slows, you can see when the bid holds and when it doesn't hold and price is going to move through a key reference area....if you do it long enough and you have the proper resources it is no different than any other profession....there are people who do it well and those who do it badly (and they don't last long)....

 

Steve

 

You have no intention of being helpful at all in this thread? I see.

[jackb 10]

It seems you prefer to get into a debate about religion, and that's not what we're here for. Clearly, Tradewinds was just trying to say that no one really knows the truth, therefore whoever is telling you they know everything, is lying to you. If you can't figure that out for yourself, why are you so quick to insult?

 

 

What about my post did you contort in your mind as being an insult? If you can't respond with a specific example, I'll be happy to oblige.

 

And who are you to play judge as to "what we're here for"? While flailing around on your soapbox, you seem to have forgot to direct your comment to Tradewinds as he's the one that brought up subject.

 

And why are you posing a question to me that isn't related to trading? Isn't this a violation of your own rule?

Edited September 21, 2011 by jackb
sp

[$5DAW 10]

Thanks Do or Die for the great introductory post to this thread. I'm often reminded of my tendency to forget about the gray matter between my right brain and my left brain when I'm "ALL IN" one side or the other.

People who venture into trading first must learn just what style fits them the best, and follow it. Jumping from one form to another at initial learning stages can waste a lot of effort. It's important to understand your time frames and take a real assessment of just how much risk/time you will have to devote to your trading.

Like many, I've been trading for many years, and must confess your quote above may have saved me countless hours/weeks/months of trying to turn Art into Math. I think on some level newbies must bounce between the two until they find their comfortable fit, but if they read your post and realize that's what they're doing, they may find their comfortable fit much sooner than later. I love the game, both sides of it, but today I'm well aware (most of the time) of which side of my brain is in the game and which side is (suppose to be) sitting on the bench. Thanks again for a great post.

[zdo 20]

People who venture into trading first must learn just what style fits them the best, and follow it. Jumping from one form to another at initial learning stages can waste a lot of effort. It's important to understand your time frames and take a real assessment of just how much risk/time you will have to devote to your trading

 

Thanks. The first and third sentence is a better way of saying my mantra to noobies

"Find your own way!" zdo.

I would suggest though that the "jumping from one form to another at initial learning stages" is actually adaptive in the long run and only becomes a "waste" of effort if one doesn't mature past that phase. Within the '10,000 hours' model, Steenbargar produced a pretty well researched article about how this stage integrates and synergizes the development of exellence. I personally wouldn't trade anything for my early "jumping" days...

[umfan92 10]

Alright Jackb, you say you didn't mean it to be insulting. So I apologize. I guess It just sounded that way to me.

[jackb 10]

Alright Jackb, you say you didn't mean it to be insulting. So I apologize. I guess It just sounded that way to me.

 

No, I was struggling with understanding the logic. Your apology is very gracious. Thanks much.

[Do Or Die 10]

Precarious Predictions

"Spam will be a thing of the past in two years’ time."

Bill Gates, 2004

 

"Everything that can be invented has been invented."

Charles H. Duell, Director of U.S. Patent Office, 1899

 

"Who the hell wants to hear actors talk?“

Harry Warner, Warner Bros. Pictures, c. 1927

 

"Sensible and responsible women do not want to vote."

Grover Cleveland, 1905

 

"There is no likelihood man can ever tap the power of the atom."

Robert Milliken, Nobel Prize in Physics, 1923

 

"Heavier than air flying machines are impossible."

Lord Kelvin, President, Royal Society, c.1895.

 

"A late-1970's market research study commissioned by Bell Labs .. predicted a (cell phone) subscriber base of only 800,000 by (the year) 2000, and concluded there was no market at any price.'" "...by next year (2000) there were in fact be an estimated 80,000,000 subscribers in the U.S. alone.."

 

"In 1876, a Western Union internal memo predicted, this 'telephone" has too many shortcomings to be seriously considered as a means of communication." Magazine, January 2000, page 64

 

"Stocks have reached what looks like a permanently high plateau."

Irving Fischer, Yale Economics Prof., 1929

 

"I think there is a world market for maybe five computers."

Watson Sr., President of IBM, 1943

 

"With over 50 foreign cars already on sale here, the Japanese auto industry isn't likely to carve out a big slice of the US market."

Business Week, August 2, 1968.

 

"We are probably nearing the limit of all we can know about astronomy."

Simon Newcomb, astronomer, 1888.

[TRADEZILLA 10]

There are basically two types of traders- anticipatory and reactionary. It is important to understand which type you are to avoid the sins of prediction. The meaning of anticipation, prediction and forecasting may seem just overlapping but understanding each approach can save you a LOT of time and effort.

 

In Prediction the probabilities are absolute. You cannot predict something with probability 0.98. You predict it correctly or not, that is. Prediction is for fortune tellers, psychics and tarot readers. Prediction is NOT for traders. So if someone claims about predicting top/bottom you know that he is inflating ego to compensate for the lack of trading skills. Stay away from such people, which include many trading gurus.

Forecasting is more of a scientific term. An error and probability is always associated with forecasting. There are lots of trading systems which base their trades entirely on forecasting future price moves. They may work or may not work, similar to a group of traders who may or may not make money.

 

Now let’s come back to the basic two categories- anticipatory and reactionary trading. A reactionary trader is someone who identifies a price behavior rule, letting price confirm his thesis and playing the move after it has taken place, hoping for follow through. An anticipatory trader is someone who uses a premise to identify potential moves ahead of time and take a position before the price confirms this move.

 

In reactionary trading you simply ride the NOW wave, while in anticipatory you bet on future price movements. A good example of reactionary trading is daytraders who trade on price discrepancies (scalpers). Someone trading with Elliott waves will is an example of the latter type. Similarly trend following systems are an example of reactionary trading while trend-exhaustion based systems are example of anticipatory trading.

 

Some people hold that all type of trading is anticipatory, others that it is reactionary, and still others who say that it all depends on the way a strategy is defined.

 

Trading systems which are built using data mining or machine learning are by default reactionary. They tend to fail horribly at outliers (unusual market events).

 

There are some factors which determine your trading style:

• Your temperament
  
• Right brained vs left brained (arts vs mathematics background)
  
• Experience level
  

 

People who venture into trading first must learn just what style fits them the best, and follow it. Jumping from one form to another at initial learning stages can waste a lot of effort. It's important to understand your time frames and take a real assessment of just how much risk/time you will have to devote to your trading.

 

Lets take the example of AAPL on daily time frame. It showed a distinct trading range compression a month ago.

 

 

 

Reactionary trading: The trader will watch the setup develop and wait every day *patiently* for a breakout. Each day place a stop-buy order at a level on which a breakout will be confirmed. A beginner reactionary trader would have very likely shorted at downside breakout in mid-June, and then reversed trade at end of June.

 

Anticipatory trading: The trader will anticipate the direction of breakout during the consolidation phase itself. The trade will be initiated during the consolidation phase; buy near the bottom range of channel or short near the upper range of the channel. If the initial trade is a loser the trader will not reverse trade because doing so involves a ‘reaction’.

Combination approach: The traders buys (shorts) in small quantity in anticipation of the direction of breakout during the consolidation phase. Then add to existing position if the breakout is in favorable direction or take a new position if the breakout comes in opposite direction of initial trade. This approach requires more skill and experience.

 

 

Posting a comment will only take you 2 minutes, but it will be the strongest motivation for me to share something better.

 

DOD,

I believe a good trader will have to have a combination method, both anticipatory and reactionary to be flexible because there is no absolute in the market. For example, if we expect a level to hold and it doesn't, good traders are often open to the idea to reverse directions.. When the market reaches a level I deem significant, I will read price, and not have a order sitting there assuming the level will hold.. It has to show me.. I see the market as in a constant state of decision and indecision and I don't pretend to know I'm certain about the final decision though I do have my bias, but in short, I try to trade in the direction of the final decision, whichever side it comes out of.. This is both anticipatory and reactionary..

TZ

[Do Or Die 10]

DOD,

I believe a good trader will have to have a combination method, both anticipatory and reactionary to be flexible because there is no absolute in the market.

 

I totally agree

 

- there are no absolutes

- generalizations do not work

 

On similar lines beginners tend to typecast their trading as either trend following or mean-reverting but I have never seen a good trader who will lean to any one side. For example a good trend following trader will add to positions on internal retracements within that trend.