Not only when coming into the marketplace as a new trader, even people with years of experience feel the need to predict what the next market movement will be. This stems from thinking that only by predicting, you can achieve profits in the end – “you have to know what the markets are doing tomorrow, you have to be smarter than the market and beat it.” Therefore most traders will set take profit targets for their trades or they operate from a “get it before it gets you” point of view.
The chart attached must have been created by someone who is very excited, who very much wants to predict the next market crash scenario. A chart was therefore drawn which compares price action from the market decline in 2008 to today’s current market action.
Imagine you would correctly predict the next significant market crash, maybe the one we are in right now – that would probably mean that all your trading buddys cheer you, people on social networks will call you guru and trading god, plus, if you have the guts, you can make a decent amount of money by being right on this call. However, at the end of the day, the question is not if you can make money on one trade, or if you are recognized in the field (except your goal is to become famous), the question is: Can you make money to live a decent lifestyle by trading for the rest of your life?
Because of that successful traders don’t focus on predicting a market crash or the next bull market phase. They know it’s futile, they know it doesn’t matter if you trade that crash or not.
Sure, the profit potential is great when a market moves rapidly without looking back. Still, a way to make money is not what you see on Forex Forums, Twitter or Facebook. Most people engaging in these social platforms have problems that prevent them from making money: they want to be right, they want to be the best compared to others, they want to tell you why what you are doing is wrong. They will act like they know what will happen, and they want to assert their being right by telling you how wrong you are.
A successful trader then has nothing to really add to the conversation. He doesn’t know what is going to happen. He could start and waste energy trying to convince the other that he also can’t possily know what’s going on. The pro would come up with arguments such as the market place consists of millions of traders, the marketplace is irrational, the marketplace is inefficient, the marketplace is not the same that it was yesterday, electronic trading and globalisation have changed market behavior. He would go on and talk about the many proven Hedge Fund Managers operating from the non-predicting standpoint, pointing out that there aren’t too many people on Forums coming up with a decade-long track record proving their positive trading results.
While this opens him up to just more flaming done by the inexperienced trader, a trader acutally making money trading different markets realizes right away that all his arguments are undeniable facts, that dictate what you can and can’t control in this business. And that is a very important realisation: you are being dictated by the market’s price, margin requirements and trading hours etc., what you can and can’t do.
While it may first of all seem as if you are in an environment where you are completely free – you can buy whatever you want, whenever you want it and how much you want of it, everyone sticking around long enough soon understands that this is no way to try to make moeny. You will need some sort of technical or fundamental guidelines that tell you when and where to buy, how much to buy, and the same goes for exits.
Arriving at that point, most traders are starting to go into the business of predicting. As mentioned in the introduction, it’s not just that principles like Elliott Wave Counting or price targets are put to work, the whole mindset is made up in a way that most traders stick to their losing positions but they cut their winners. Because they want to be right, in a losing trade they wait until the market eventually proves them right (which won’t happen), and in a winning position they lock in the profits too soon so that money is left on the table.
Thereby they are very much trying to beat the market, to get out before it turns around and gets them. They lock in profits to achieve a high winning rate, and they let losers run because they don’t want to see any losses in their performance. An 80-100% Winners strategy seems to be the goal.
If this behavior is paired with a lack of Risk Management, for example if a trader risks 10% on a trade or puts all eggs in only one or two baskets, then it won’t take long until he has lost all of his trading capital.
It is no way to have a predictive scenario for what a market is going to do and hold on to it, even if the market proves it incorrect. Understandably, a trader whose only navigational tools in the market place are his predictions, has no other choice than to hold on. But if you don’t incorporate in your trading approach the idea of being proven wrong, the idea of adapting to market movement and furthermore Risk Management Control factors, you are doomed. Or do you plan to wait until a Stock has gone to 0 before capitulating?
If you don’t have a plan, if you think the market just goes up forever, or if you think an Elliott Wave is missing and it will definitely show, or the tip from your broker can’t be wrong, you must understand that the market does not care about you, your scenarios, expectations, what you think of it or what you want from it in general. On the other hand, the markets also don’t remember you. It has no idea if you have been there yesterday, if you were successful or not. It doesn’t know if you are afraid, overconfident, rich or poor.
And that gives you the simple advantage that you need to improve your results. By adapting to whatever the market-god tells you, there is no way you can’t make money if you just pay attention to the three most important factors in trading.
But, this is actually the huge turning point for most unsuccessful traders. It is a big deal and not too easy to comprehend. It’s even harder to incorporate into one’s thinking:
It actually means that you fully stop having any prediction at all! It means that you are not in the business of thinking ABOUT the market anymore, you have entered the business of thinking WITH the market. Now you are not bragging about your positions or the leverage you have currently taken on anymore, you know that you KNOW NOTHING about what will happen next in the markets. It would therefore be extremely stupid to brag about something of which’s outcome you have no control over. It would also mean that you never risk too much of your trading capital on any trade, it may go against you, you just don’t know. It would also mean that it’s useless to build up any sort of expectation or scenario of hope or dream, loss or frustration if this or that happens/doesn’t happen – because you don’t know.
It means that you are very much present in the moment of now – wherever the current price is, you will have no problem to accept it, because you understand that price is always where it’s suppossed to be, that’s why it’s there! You won’t get caught up anymore in past losers or be distracted by future gains. There is no use in doing, because you can only profit from what is happening in the now. Not the yesterday, not the tomorrow.
Pro Traders realize these circumstances, which are true for everyone in financial markets – banks, governments, institutions, retail traders etc., and accept them.
While it will actually take some psychological work to go from the big-ego trader to the humble one who admits to himself and everyone else, “I don’t know.”, doing this work is absolutely worth it.
Not only will you experience the positive effects in other areas of your life, you will also realize that you simply have to come up with a trading approach that is able to react to whatever may happen next in the markets: a system that gets you in, protects your capital and takes profits efficiently, exercising money montrol that limits your absolute account exposure and of course a thorough psychological process.
Once you have those mechanisms in place, you will not do more than simply follow the market wherever it goes, executing whatever it tells you to.
You are not fighting it, you are not trying to beat it anymore. You don’t perceive the market as this wild devil that is out to get you, instead you realize that if you consistently follow your plan, manage your risk and watch your psychological process you are actually engaged in a game that is about controlling risk and compounding profits.
There is enough money for everbody in financial markets, you don’t need to be afraid you won’t get a piece of the cake or that markets will be shut down soon. Therefore, the idea of hitting a home-run trade on which you risk all of what you got, the idea of successful traders knowing more/being smarter, the idea of manipulated markets or the idea that no one makes it in trading, they all become obsolete. They have been outgrown.
Because you are not predicting anymore, you are accepting now, adapting to whatever the market flow offers you, taking your profits – big or small, as well as your small losses.
There is no need to predict, there is a need to accept and adapt!
Managed Futures do not predict, they accept and adapt by systematic trading, check out their performance for the devastating month of Jan 2016. Just for your reference World Indices at the end of Jan 2016: SP500 -5%, Nasdaq -8%, MSCI Europe -5%, MSCI Japan/Pacific -8%.