Saturday, 4 November 2017

Is it prediction or anticipation, maybe expectation?

The definition for anticipate is to think of (something that will or might happen in the future). : to expect or look ahead where prediction - pre means “before” and “diction” has to do with talking. So a prediction is a statement about the future. It's a guess and not always based on facts or evidence.

Prices, not investors, predict the future. Despite this, investors hope or believe that they can, or someone else can predict the future. If you believe that it’s possible predicting the future, stop reading. The following information is then not applicable.

Ask yourself, if you want to be right or do you want to win. They are different questions. Nobody can predict the future or any event or direction of the markets. No one knows. If this statement does appeals, continue reading.

There are two VERY DIFFERENT terms to consider when it comes to trading: 1) Prediction and 2) expectation (or confidence) surrounding the prediction.
Placing a trade involves making a prediction. It is not possible to place a trade without making a prediction, and that is true even for trades that might or might not execute, such as those placed using a stop order or limit order, for example.

Every trader who places a trade does so because the trader believes there is some chance, greater than 0%, that the trade will be beneficial, perhaps based on historical probability (back testing) perhaps based on intuition (years of trading experience) perhaps based on hopes and prayers or possibly based on nothing more than a need to gamble. Whatever the basis, there must be SOME chance to benefit or else the trader would not entertain it. The trader predicts he or she will benefit, or else the trader does not enter a trade order.

No matter what the prediction may be, so long as the EXPECTATIONS for the prediction are based in reality, there is nothing inherently wrong with making a prediction. As long as a trader accepts a 30% win rate, for example, and makes allowances accordingly, there is nothing wrong with taking such a trade. The same is true for trades with 50/50 odds, as long as the trader properly predicts, expects, and is prepared for 50% failures; which is why it is possible to flip a coin and still be successful.

Many successful traders may say they never predict, when what they may really mean is that they never EXPECT their prediction to come true. Thus they may say things like “I only react” when more accurately they are reacting… to a failed prediction. For, it is virtually impossible to trade without predicting. So:  “don’t be afraid to predict. Just know how likely it is that you’ll be wrong, and know what to do when your prediction fails!”

Market change is constant and because change is constant, uncertainty is constant. From uncertainty, trends emerge. Trend followers respond to what has happened rather than anticipating what will happen. They are using a reactive technical approach based on price. 'The trend is your friend, except at the end when it bends'.

Only the prices give direction to the market. All indicators are history based and so price, but current price is real. Three sides to the price, up or down and the right side. "Price makes news, not the other way around. A market is going to go where a market is going to go." The moment you add any other variables to the decision-making process, you've diluted price.

"Let's break down the term 'Trend Following' into its components. The first part is 'trend'. Every trader needs a trend to make money. You think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices. . . 'Following' is the next part of the term. We use this word because trend followers always wait for the trend to shift first, and then follow it."

The idea is to take small positions early on in a market to see if the trend does, indeed, mature and get big enough to make big money. Then start adding to this profitable position. The more volatile a market, the less you trade and the less volatile a market, the more you trade. The strategy is to 'cut losses' and 'let profits run'. Trend followers buy (long) high and exit higher or sell (short) low and exit lower. This is counter-intuitive you have a big advantage for most people.

Market trends are more pervasive than people thinks, and could have been traded in the same way 200 years ago as they are today. All you need to do is to identify and follows the trends. 'Go with the flow'. Running with the 'Bulls' and/or 'Bears' for absolute returns.

Trend Following is not about what you must master, but what you must eliminate from your market view. By avoiding volatility, sit through it and stay with the long-term trend.  It’s the discipline to stick to the rules in the toughest of times. Success is much more predicated on discipline than pure academic achievement.

In a zero-sum game, for every winner there is a loser: "Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money!" - Ed Seykota

Trading is a zero-sum game when gains and losses are measured relative to the market average. In a zero-sum game, someone can win only if somebody else loses. In the zero-sum world of trading, if the trend is down, it is not a buying opportunity it is a selling opportunity; a "time to go short" opportunity. The key to success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well.

Winning traders can only profit to the extent that other traders are willing to lose. Traders are willing to lose when they obtain external benefits from trading. The most important external benefits are expected returns from holding risky securities that represent deferred consumption. Hedging, derivatives and gambling provide other external benefits. Markets would not exist without utilitarian traders. Their trading losses fund the winning traders who make prices efficient and provide liquidity.

Why some investors sell their winning stocks too early, but hold on to losers for too long. It is human nature to take the profit from a winner quickly on the assumption our win won't last for long, and stick with a loser in the futile hope it will bounce back. However, trend followers know if you don't cut your losses short, there's a good chance the losses will get larger. Trend followers ignore sunk costs. If you buy and the market goes against you, exit. Take your small loss and go home.

Don't ask: how do you know the trend is moving up? Instead ask: what is going to tell me the trend is up? Not: what do you think of gold? Instead ask: am I correctly trading gold?

Put up one-third of the ultimate position. If you lost 25 percent of that stake, get out. "Never mind the cheese, let me out of the trap." But when the market move your way, add another third, taking a final position when prices climbed half as high as you thought.  Trend Following is really a form of trial and error. The errors are all the small losses incurred while trying to find those big trends.

One of the biggest mistakes most investors make is believing they've always got to be doing something . . . the trick in investing is not to lose money . . . the losses will kill you. They ruin your compounding rate; and compounding is the magic of investing. You can't get rich overnight, but with compounding you at least have a chance. 

Compounding is not easy to do in a society forever focused on instant gratification.

I am a trader because my interest isn't in owning stocks per se, but in making money. And while I do trade in stock: (among other investments), I don't have blind faith that stocks will necessarily be higher by the time I'm ready to retire. If history has demonstrated anything, it's that we can't simply put our portfolios on autopilot and expect things to turn out for the best. You can't be a trader when, you're right and an investor when you're wrong. That's how you lose. To catch more fish, go where the fish are.  

How can the trends (up and down) are ignored? If you follow trends, you don't need to know anything about the companies to trade their trends. Your trading technique is designed to ride the trend, so neither company earnings nor value nor any other fundamental data is pertinent to your decision making. Trading is not about buying into companies. Trading is about making money.

When I tried to predict, I was usually wrong, and I invariably missed the big move I was anticipating, because it wasn't time. It was when I finally concluded that I would never be able to predict when the market will move that I started to be more successful in my trading. My frustration level declined dramatically, and I was at peace knowing that it was OK not to be able to predict or understand the markets.

Derivatives are financial weapons of mass destruction, carrying dangers, while now latent, are potentially lethal . . . We view them as time bombs, both for the parties that deal in them and the economic system.

Trend followers have taken their philosophy and reduced it to formulas to guide them in their daily decision-making. These formulas comprise what are commonly called trading systems. These trading systems must be quantified with rules that govern your decision-making.

Trend followers understand that life is a balance of risk and reward. If you want the big rewards, take the big risk. If you want average rewards and an average life, take average risks. Successful people understand that risk, properly conceived, is often highly productive rather than something to avoid. They appreciate that risk is an advantage to be used lather than a pitfall to be skirted. Such people understand that taking calculated risks is quite different from being rash.  Playing it safe is dangerous. Life is fraught with risk. There is no getting away from it. Life is a game of chance; we must deal with uncertainty, which is never risk-free - especially with trading and money on the line.

How do you proceed in the face of all this risk? You begin by accepting the fact that markets do not work on a first come, first served basis. They reward those with the brains, guts, and determination to find opportunity where others have overlooked it; to press on and succeed where others have fallen short and failed. The right decisions lead to wealth and success; the wrong ones lead to bankruptcy.  The amount of risk we take in life is direct proportion to how much we want to achieve. Calculated risk lies at the heart of every great achievement and achiever since the dawn of time. Trend followers thrive on calculated risk. Trend followers don't worry about what the markets are going to do tomorrow. They can't undo the past and can't predict the future.

Trend Following - How Great Traders Make Millions in Up or Down Markets 
by Michael Covel    

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