Posted on Saturday, February 21st, 2015 at 12:42 pm.

Predicting the future is something humans having been doing since the dawn of time.

From Nostradamus to tarot card readings, there will always be a business for trying to predict the future because the ability to act now on the knowledge of something that you know will happen in the future holds a huge advantage.

But as a trader, do you need to predict the market’s future to make money?

TV Soothsayers

Trying to predict single market events is never easy. There are a sea of professionals in the financial world who frequently get it wrong. Just as a broken clock is correct twice a day, there’s bound to be some hotshot who gets it spot on.

But it’s not just the inept that get it wrong either.

Errors in judgment are understandable due to the incomprehensibly large number of variables to consider in forming a hypothesis. But then there’s always outside factors that have not yet influenced the scenario.

Even after taking this into account, people go on the financial news channels trying to predict the market’s future. But then they tend to talk in “ifs” and “buts” rather giving definitive predictions and of course, there’s never any disclosure on how the scenario would impact their own trading portfolio.

The problem with these guys though is that it gets the average day trader into the wrong mindset and whilst you might think that this isn’t something you do, you might well be wrong.

The Prediction Trap

Falling into the prediction trap is not difficult if you’re not careful. Historical losses often put traders into a defensive mindset and so when they do take a trade, they’ve gotta be pretty convinced that the trade will work – but of course, this is no guarantee of selecting a winning trade.

But when a trade does work, the trader figures that they were right in this instance and so in the future, they struggle to find reasons why another instance of the same sort of trade doesn’t work.

The perfect trades that we come across in the markets and can spot by scanning historical charts can also be counter-productive. Often markets end up testing specific prices and possibly turn from a point that we think of but predicting this and trading the behavior are two very different things (often why analysts don’t make good traders).

Plus if you look closely, historical charts are pockmarked with similar setups that ended up failing but we remember the times when we were right more clearly as it feeds into our emotional self-belief system.

Variability of Day Trade Outcomes

In any case, there’s a big difference between trying to predict market movement on a broad scale over a longer and non-specific amount of time and doing the same over the course of a couple of hours, a few minutes or even a few seconds. Day trading is done on a much smaller timeframe and as such, there are factors that affect the variability of results.

Testing is one of these factors – when we test a strategy we identify how frequently it scores a winner, not what the distribution of winners and losers actually is. The strength of day trading is that you can take many, many trades – so you can screw up on some and others can just not work, but you still end up turning a profit if the strategy has sound logic behind it.

It is far more difficult to be specific about which trades will win or lose.

When we trade, we have to make our decisions on what the market has already done. The inferences we glean from the market information is that it’s probable that other traders will do something expected based on the same information we see and we will end up with a profitable trade.

What other traders will do is another factor.

On a very short timeframe, it does not take very much of a change for different traders to step in and completely flip the situation on its head.

And this is assuming we’ve got it right anyway – of course, there are so many different things going on in the market at any one time that could influence another trader, that it’s effectively impossible to keep track of everything.

Plus, just because something happens in a market that is normally unrelated, it could impact a large trader’s or fund’s portfolio enough for them to have to do something in the position they have in the market you actually trade.

Do you need to predict the market’s future to make money?

The bottom line is, we can be right or we can be wrong on a single trade and it’s a mug’s game trying to predict which it will be for the next trade you take.

The simple fact is that you don’t need to try to predict what’s going to happen next – all you need is a strategy that works more than it doesn’t and the ability to follow your trade plan.

So I’ll leave the prediction game to the market prognosticators who frequent the financial news channels and stick to trading the probabilities.