An astute trader considers a wide range of possible outcomes and is ready to move as conditions shift.
That’s an important point to remember in the current or any market, according Real Money Columnist James “Rev Shark” Deporre.
For instance, he noted, earlier this year there was a big jump in predictions the market would see a dramatic correction. Some were based on charts and some were based on large macroeconomic concerns.
According to Rev Shark, outlooks like that are mostly useless and a detriment to good trading.
“The biggest problem with predictions is that they create an expectation,” Deporre wrote recently. “We all want our predictions to be correct, and therefore we are constantly looking for information that will confirm our pre-existing bias.”
One form of prediction that Rev Shark finds particularly unhelpful are price targets.
“We buy a stock, set a price target, and then go to the beach while we wait for it to hit,” Deporre wrote. “It relieves us of the burden of having to deal with the stock at all. Since targets are obviously so effective, we don't need to do anything else.”
Predicting what the indexes are going to do is just another form of price target and a staple of the business media.
“The main reason these predictions are so common is that they are made without any real consequences and are encouraged for ratings,” Rev Shark said. “These pundits often have no money on the line, and you can bet that the predictions go out the window if they actually do have money invested.”
The biggest problem with predictions is that they create an expectation.
“If you make your living by trading the market rather than talking about it, you quickly realize that if all you do is make predictions, then you’re very likely to have very poor results,” Deporre noted. “The main problem is that predictions do not take into account "risk." When you have real money on the line, you have to consider the consequences of being wrong, and that makes most predictions just downright foolish.”
Yet grand predictions lead to being grandly wrong if you lack flexibility. “Effective traders can't afford that mistake,” Deporre said. “If you want attention, then make big, bold predictions, but if you actually trade that way, the cost is far too high.”
The truth is, the market is not going to do the simple and logical thing that many think it will do.
“It’s going to have all sorts of twists and turns along the way, and if you are dogmatic about making predictions, you will be unable to navigate them effectively,” Rev Shark said. “Embrace the idea that you don't know what the future holds. Deal with what is in front of your face, and be prepared to react and reposition as conditions change.”
