how do you predict the future?

[wekim]

I'm talking about directional trading here.

I understand that with arbitrage or spreading against different instruments, you can find one market thats out of line with another and lock in some profit. That makes sense.

But when you trading directionally, you are trying to predict the future. You are saying, "I'm going long here because I think in the future, the buying pressure will overwhelm the selling pressure and price will rise." And vice-versa for short. You need to use your price/volume analysis or indicators or whatever to help you determine that. But how do you do it?

To steal a picture from DT's webinar:

 

[tomorton]

On the simplest level, we know two things about market TA - once prices have established a trend, the most likely thing to happen tomorrow is that the trend will continue: but every trend is marked by short-term pull-backs. These two characteristics give us direction and entry points.

Support/resistance level studies combined with volume data for market behaviour at those levels help us predict price levels that will porobably be more significant, but is the game any more complicated than that?

 

[rsh01]

You don't predict the future. Once you have acquired an edge (after spending thousands of hours learning/practising etc), you will be taking trades with a stop loss of 1 (for example), and a target profit of 2 (so rr 1:2) and your edge will mean you are right >33% of trades, and you will then be making money. How good your edge and MM is should determine how much >33% you are right. Its possible a trader may have a plan to sell the market if it pops down and a plan to buy the market if it pops up, so they don't care which way it goes. Their focus is on preparing for both eventualities, and executing these trades to the best of their abilities.

Noone can predict which way the market is going. (Apart from the baghdady's of this world)

 

[trendie]

You put aside any belief that markets can be predicted.

In directional trading, you determine the most probable outcome given the recent trading direction.
I suppose, in trend-following, the axiom is that the market is more likely to continue in its current direction than to change.

Using your analogy, another way to look at it is;

You are saying, "I'm going long here because I think the buying pressure has already overwhelmed the selling pressure, and price has risen beyond the indeterminate range it was previously in".

If the price seems to be rising, it likely to continue to do so, unless it settles below X.
And vice-versa for shorts.

Alternatively, if price doesnt seem to be rising or falling, you determine the upper and lower regions of the range that need to be broken for the uncertainty to be broken.
No predictions. No guessing. Just wait for the fact, then jump on-board as best you can.

The only prediction is the broker will for sure be making a commission/profit irrespective of the direction ANYONE takes.

 

[The Leopard]

You are not trying to predict the future (no need to add future, by the way - what else would one predict? The past? The present?). You are trying to make money.

Getting the direction right is a small part of it.

For example, most new traders are concerned with win rate. If you offered them a win rate of 66%, they would prefer this to 50%. I am not sure why - try going into a shop and paying with win rate.

Two months ago, I had a win rate of 50% - no better than a coin flip. I made a little over 10% - a vendor would laugh at that of course, but as a trader I was quite happy with it.

This month I have thus far a win rate of 66%, and a return of a little under 8%. Which month wold you prefer?

Don't try to predict the future, try to make money.

By the way, if you want a system that will get the direction right (or predict the future if you prefer) better than 90% of the time, just ask and I will give you one, free of charge.

 

[ChocolateDigestive]

All good stuff. So if trends are more likely to continue than reversing all we need to do is find instruments that are trending strongly with little or no pullbacks. then trade with them watching out for any obvious obstacles ahead. Add in sensible money management and finding instruments with low costs compared to position size and you have it made.

 

[wackypete2]

how do you predict the future?

For starters you'll need a DeLorean and a flux capacitor.

Peter

 

[the hare]

For starters you'll need a DeLorean and a flux capacitor.

or a secret nazi box

 

[DionysusToast]

I am not sure if this is a semantical or a philosophical discussion.

Whatever type of trading you do, be it outright directional trading or some form of spread/stat arb strategy, you are putting money into something where one future outcome will see your funds increase and one will see your funds decrease.

For the life of me, I can’t see how this can be called anything other than a prediction.

 

[trendie]

I am not sure if this is a semantical or a philosophical discussion.

Whatever type of trading you do, be it outright directional trading or some form of spread/stat arb strategy, you are putting money into something where one future outcome will see your funds increase and one will see your funds decrease.

For the life of me, I can’t see how this can be called anything other than a prediction.

I suppose it's semantical, now that you raise that angle.

If you use the term "predict", it raises emotional, psychological notions of being "right" and "certainty", and the slippery wedge of adding to losers and doubling up, etc, cos it just "has to" go in a particular direction.

If you think in terms of "likely to happen", built into this notion is the account-protecting self-awareness of being wrong, and getting out sooner.

 

[trendie]

For starters you'll need a DeLorean and a flux capacitor.

Peter

Or, if you can't get hold of those, some of the funny powder DeLorean got caught with.
It makes ANY car a DeLorean, and the SatNav take on all the characteristics of the said FluxCap.
(did that film have oedipal undertones?)

 

[wekim]

On the simplest level, we know two things about market TA - once prices have established a trend, the most likely thing to happen tomorrow is that the trend will continue:

I suppose, in trend-following, the axiom is that the market is more likely to continue in its current direction than to change.

But this is a prediction. Who says its more likely to continue? That is your prediction based on your experience. Obviously someone disagrees with you and is willing to take the other side of your trade.

Using your analogy, another way to look at it is;

You are saying, "I'm going long here because I think the buying pressure has already overwhelmed the selling pressure, and price has risen beyond the indeterminate range it was previously in".

If buying pressure has already overtaken selling pressure, then how are you not sure that you aren't getting in super late and buying the top?

 

[wekim]

You are not trying to predict the future (no need to add future, by the way - what else would one predict? The past? The present?). You are trying to make money.

Getting the direction right is a small part of it.

How else do you make money other than predicting the correct direction? (aside form arbing)

I don't really see what winrate has to do with it. Obviously 10% roi is better than 8%, anyone would take that.

 

[The Leopard]

How else do you make money other than predicting the correct direction? (aside form arbing)

I don't really see what winrate has to do with it. Obviously 10% roi is better than 8%, anyone would take that.

Actually, most newbies wouldn't - they'd go for the high strike rate.

Anyway, do you want my system or not? It will win over 90% of the time, which is as near to being able to predict the future as you're likely to get.

You want to predict the future and it is important for you to do so, so I'd advise you to take up my offer.

 

[DionysusToast]

I suppose it's semantical, now that you raise that angle.

If you use the term "predict", it raises emotional, psychological notions of being "right" and "certainty", and the slippery wedge of adding to losers and doubling up, etc, cos it just "has to" go in a particular direction.

That is my take on it. I think that people that are against using the word 'prediction' in trading are doing so because they associate it with certainty.

 

[DionysusToast]

Actually, most newbies wouldn't - they'd go for the high strike rate.

Anyway, do you want my system or not? It will win over 90% of the time, which is as near to being able to predict the future as you're likely to get.

You want to predict the future and it is important for you to do so, so I'd advise you to take up my offer.

So when you take a trade, you have done no analysis to figure out the most likely future outcome of the scenario that gets you into the trade?

This isn't about win rates, it's about whether you are making a prediction when you enter a trade. When you trade directionally, if you enter a long, you are predicting that somebody will buy that contract/share from you at a higher price later on.

Prediction is not synonymous with certainty. Weathermen predict the weather, Andy Gray predicts football results, punters predict which horse will win and traders predict where price will end up. None of them are certainties but they are predictions.

 

[bbmac]

I don't think it is semantics. Acting on an edge and predicting are 2 seperate things. When we act on our edge we are simply relying on the fact that in the 000's of times that edge has set-up in the past it achieved a winning outcome on x % of times When we act on our edge we know and accept that we do not know what will happen next - ie which times will produce winning or losing outcomes...we are not predicting what will happen - we cannot as has already been stated - we are simply playing the edge and if we optimise our money and risk management to the edge then we will make money over any given sample of times the edge sets-up. Prediction would be entering the market beacuse we think we know what the future direction will be. It's more than semantics - there is a difference.

G/L

 

[The Leopard]

So when you take a trade, you have done no analysis to figure out the most likely future outcome of the scenario that gets you into the trade?

Of course I have done analysis.

This isn't about win rates, it's about whether you are making a prediction when you enter a trade. When you trade directionally, if you enter a long, you are predicting that somebody will buy that contract/share from you at a higher price later on.

I am sure many non-traders and beginners imagine this to be the case, and sometimes it might be (although very rarely and in my view the person that makes such a prediction is foolish for doing so). But it is by no means always so - I enter many longs (and shorts) expecting to lose, because that is what happens more than 50% of the time. I fully expect that there will be no-one to buy the contract at a higher price, because that is the most likely outcome. Stating that you must be expecting higher prices because you enter long is absolute nonsense. At other times, I have no expectation of outcome at all.

Prediction is not synonymous with certainty. Weathermen predict the weather, Andy Gray predicts football results, punters predict which horse will win and traders predict where price will end up. None of them are certainties but they are predictions.

I'm not sure how old you are, but you're a little out of date. Weathermen don't predict anything. Like all people on TV, they possess no useful skills and so make a living by reading out things prepared by people that do.

I have no interest in or knowledge of soccer, but from what I gather Andy Gray's unhappy predilection for using unfortunate phrases such as "smash it" and "hanging out the back of it" at inopportune moments means he has less to do with the hideous game than formerly. I understand that he now spends much of his time making after-dinner speeches to people marginally less crass than him.

Punters predict nothing and many don't even try to, especially those who attend the course.

Would you like my system? It's free to anyone who wants it and it will predict the future over 90% of the time.

 

[bbmac]

The difference between prediction and trading an edge is summed up in the definition of a trading edge;

A Trading Edge is a repeating circumstance or set of circumstances (ie a set-up or combination of set-ups) that suggest a greater probability of one thing happening over another, based on historical precedent. Additionally and/or alternatively; if the edge does not suggest a greater probability of one thing happening over another, then based on historical precedent, it suggests that more gain is available when it succeeds than when it fails, sufficient to realise a net gain over any given sample.



The 5 Fundamental Truths of Trading as penned by the excellent Mark Douglas (Trading in the Zone, The Disciplined Trader etc..) includes

* Anything can happen.

* You don’t need to know what is going to happen next to make money.

* There is a random distribution between wins and losses for any given set of variables that define an edge.

again this argues the difference between prediction and actually trading an edge.


G/L

 

[the hare]

So when you take a trade, you have done no analysis to figure out the most likely future outcome of the scenario that gets you into the trade?

Usually not.