Thursday, January 29, 2009

Does “forecasting” really always mean getting it right every time?

I mean, isn’t it possible to take profitable trades when the forecast is wrong?

There does seem a predominance of linear thinking by many in the market. There’s always a hint of the ego, the self belief that if you don’t all it right then you’re a failure. After all, trading is a stressful pastime and the testosterone levels tend to spill over into “attitudes.”

Everyone wants to impress by saying they forecast the Dollar was going to do rise, fall or whatever. When I was trading in a bank the swagger by traders were how they “bought $50m at 35… some **** (expletive removed) was selling all over the market. Went down to the figure but I thought, “nah… I’m goin’ to hold this” and I sold out with 50 pips profit…”

It was a bit like the one-armed fisherman who caught a fish “this long…”

Anyway, so what if someone says, “The Euro’s going up to 1.44.” Ok, fine… where so you get in? Where so you place your stop? When do you take profit?

How big must your stop loss be?

I admire people who can make these calls. I do make them too but I’d like to make them more frequently. However, what is missing from their calls is knowledge of what level to enter and where to leave stops.

More fundamentally they fail to understand how price moves, how it develops and to what degrees. Fibonacci and harmonic ratios really help. Sometimes they can provide support & resistance within a pip or two.

However, to produce these levels requires understanding of price structures, just what a correction means – a correction to what move? One of the favorite tricks is to calculate Fibonacci retracements to as many peaks and troughs as possible. Where these come in a cluster is where price should stop.

Sometimes it works – but it doesn’t really tell you where to place your stops… It doesn’t give any indication of what will happen next. In other words traders work with blinkers on and often “trade blindfolded.”

However, it needn’t be this way. Price movement can be understood and anticipated. There are still confusions and often mixed indications which complicate. However, the greatest benefit is being able to identify when your call is wrong…

That is why my subscribers make money either way.

I tell them what I think is going to happen – but I’ll also tell them not only at what level I’m wrong but the likely impact of the break of support/resistance.

However, this means that traders have to shed their cloak of invincibility and begin to think less linearly.

When that happens the reaction is not: “You called it higher and it didn’t even reach your first resistance…” but turns to be “I knew once price couldn’t break through your first resistance that break of that key support you quoted was going to produce a good trade…”

And that’s the clue.

Dismiss the need to forecast and learn to understand what impact a break of support or resistance will have. Understand what those levels mean. While I have my own ego and I love to get it right all the time, I do prefer knowing that my subscribers get the key support & resistance levels which provide the profitable moves…

After all profits are more meaningful than forecasting correctly all the time…

Ian Copsey
© Ian Copsey 2009