What is the difference between forecasting and forecasting?

There are many signaling services, newsletters and trading halls offering forecasts for the coming days, weeks and months ahead of what the market will do. This is a very tempting offer to give subscribers peace of mind about what will happen in the market. Some believe that it is possible to see what the market will do and subscribers follow these services. Unfortunately, predictions do not exist, even if these advisors are spectators. No one can make the right predictions even 50% of the time in a row, the market is either rising or falling.

When traders predict what the market will do, is it the same as forecasting? The forecast is a declaration that something will happen exactly in the future with only one result, while the expectation is to think in advance about all possible results. The wait requires dealing with the problems before they arrive; the prognosis is to expect something to happen without dealing. Forecasts tend to take a bias or position, while anticipation requires careful consideration of what may happen: good or bad.

An example of expectation is when a trader observes a rise in prices and an approach to an old level of resistance. He expects prices to continue or reverse. He needs to prepare to deal with both scenarios. One is to prepare for the breakthrough and keep going up, he has to determine at what price it will go a long way and where the stop loss will be placed. If prices reverse, he must determine where the short entry will be, as well as the stop loss. These scenarios prepare him for the next price movement, predicting what other traders will do when prices reach the level of resistance. If he predicts what prices will do, say, it has risen and continues to rise. He has no plans for a possible turnaround. It is focused only on the upward movement and not on the possible reversal or consolidation. These scenarios need to be constantly considered and planned, as markets are constantly evolving. This mentality makes a huge difference between a successful trader and a losing trader.

Prediction is a loser’s game that feeds the need to be right instead of the need to make money. The ego is often the culprit to show other traders how good he is at predicting the direction of the market. In trade, ego and profitability cannot coexist. If it is not ego, most traders will look for one direction and then use evidence to support that bias, ignoring the evidence that may support the opposite direction. This bias predicts the future. He tends to carry the thinking until the trade is made. It may be a profitable trade, but in the end the trader is so convinced of this bias that when the trade fails, he will have no alternative in preparing for the loss.

One of the desired traits of a successful trader is his ability to prepare all possible results, to imagine the scenarios that the market can make, up or down, before the trade takes place. He knows he can’t predict, but he can calculate the probability that the market will develop one way or another. Anticipating the outcome, he has a plan for one result or another. What will happen if the market contradicts its position, where will it go? What happens if the market is in favor of its position, where does it have to go to make a profit?

Anticipation is preparation for both results, good or bad. Calculating how much to lose is just as important as how much you expect to gain. This means that the trader will identify in the chart where he will see the entry point and two exit points (stop loss and profit target). Through this method, he can identify his risk-reward ratio as well as the probability of trading success.

So how do we overcome this dilemma? Probabilities can be established by rigorously testing historical data based on the strategies the trader plans to trade with them. Finding statistics to support his idea that the strategy works will give him confidence in approaching the market and will give him the attitude to predict rather than predict the results. One way is to see the market, which shows us either through price action or through an indicator.

Realize that prices or metrics can change direction at any time. Using statistics to make a reasonable assumption, the trader can find out in which direction the market is likely to go. But probability cannot guarantee the desired result. This means that there must be a contingency plan, ie. stop loss in case the desired result does not occur. This is why successful traders have a stop loss. Stop loss is a deciding factor that determines whether the result worked or not. The trader must accept that the market will always be right and trying to be right will prevent the trader from being one with the market and continuing to flow.