I predict

One of the most common questions that I am asked is along the lines of  “what do you think is going to happen to (insert as appropriate emini S&P, EUR/USD, Gold, FTSE etc) “

Peoples’s faith in my physic ability is indeed touching but none the less entirely misplaced.

There has been an immense amount of research into human beings ability to predict what will happen in the future and surprise surprise the research clearly shows that we cannot predict future events with any meaningful degree of statistical accuracy. This applies just as much to short term predictions concerning for instance  emini daytrading as it does to longer term predictions such as long term trend following.

In support of the ability to predict the future many financial tipsters and Gurus will often refer to a single spectacular instance where they were indeed correct.  What they do not say is just  how many predictions they made that were wrong before they hit that single winner. If you swing at a ball often enough sooner or later you will hit one out of the park in the most spectacular fashion.

Novice traders are often looking for a Guru (person or system) that will accurately and consistently tell them what is ahead. Sadly this is a hope which all the evidence suggests cannot be achieved with consistency over the longer term.  Certainly financial gurus come and go with great frequency and I am not aware of any that has really stood the test of time.

So if your trading strategy is to rely  the predictions of a financial guru you will almost certainly come unstuck somewhere down the line.

With respect to trading systems the fallacy is that they are also in some way predictive. This is of course not true. What a trading systems developer does do is:

Identify some form of historically repeating “bias” or “tendency” in the market. Ie for instance he may observe that if a market closes down big on a Friday night  and then continues this into the Monday session then there is a greater likelihood of the market falling further in subsequent sessions (which is indeed the case with US indexes).

He will then design a strategy that will take advantage of that bias by capturing more profits than losses if and when that bias  occurs and repeats in the future. They key point here is that the developer/trader  is not predicting that such a bias will continue to happen simply that if it does the strategy has been designed to take advantage of that situation.

So whilst that bias or tendency continues the system should generate profits for the trader. However if for any reason the markets changes and the nature of that bias changes or indeed disappears altogether then the systems will not perform because the premise on which it was constructed no longer occurs.

Sometimes the markets trade similarly for long periods of time allowing systems to capture good profits and sometimes…………….the markets … don’t  !

What is therefore essential with all trading systems and in particular fully automated currency or emini  trading systems is to have a set of rules that tell you when to stop trading that method (if the bias  is seen to disappears or changes) and also when to restart trading again (if the bias re-emerges). This is an area that many traders fall down on.

In my experience simply hoping that a system will continue to work into infinity is unrealistic because it implies that the market itself will never change and of course it does.

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