How to predict markets and future price action

In skiing, when you’re in a white-out and can’t see what’s ahead of you, you don’t know if you’re about to hit resistance (i.e. a big lump of hard snow), or have the ground suddenly drop away as you go over a dip – so, it’s good to be prepared for either scenario.

It’s about balance. You don’t want your weight too far forward, you don’t want it too far back, and you need plenty of ‘shock-absorption’ in the knees.

(Apologies – I had an early incarnation as a ski instructor and can’t resist any opportunity to tell people to ‘bend the knees’!)

Of course, the natural reaction is to lock up our joints and lean back, because we’re apprehensive about what’s coming at us.

Finding balance in skiing or in any area of life is pretty simple if everything else around us is predictable and not moving. But when the world around is changing, in ways we can only make guesses at, it’s much tougher.

How the ‘Holy Grail’ of trading can help …

The obvious candidate when you want to prepare for what the markets are going to do, would be to find the perfect indicator – the one you can pop on your chart and it’ll tell you whether the market is going up … or going down.

I am a technical trader. I believe wholeheartedly in the power of technical indicators to help us view the markets more clearly.

But I also accept their limitations.

No technical indicator (or combination of indicators) is going to predict the future.

I’ve written before about the phenomenon of cargo cults. These were ‘religions’ which developed after the second world war in the islands of Melanesia in the Southwestern Pacific Ocean.

During the war, these islands were used by Japanese, then Allied forces, who brought with them a great deal of food, clothing and medicines (the ‘cargo’), which transformed the lives of the inhabitants, many of whom had had no previous contact with Westerners.

After the war, the troops – and their supplies – left. In the vacuum left behind, cults emerged, in which islanders would mimic the behaviour of the US soldiers, performing parade-ground drills, building control towers and runways. They recreated the conditions exactly as they’d seen them … but no planes, nor the cargo they carried, appeared from the sky.

This is a good reflection of what technical traders do if they over-rely on their indicators. Just getting the indicators in place isn’t enough – it won’t guarantee that the markets will behave a certain way. Technical indicators have no power on their own – they are just tools to help us read market behaviour and to spot patterns.

So, what tools WILL enable us to ‘predict’ the markets?

If you want to be able to ‘see’ through the fog of the market at what’s coming at you, there are some skills you’ll need to combine with your all-important technical indicators …

1. Accept that you’re not going to be able to read the future.

No matter how hard you study charts, you can’t work out what prices will do. Therefore, ‘predicting the future’ really comes down to a skill-set that enables you to react quickly and effectively to any outcome.

2. Be balanced.

Don’t load too much money into any one position or strategy. A sensible risk-per-trade would be 2% of your trading pot, but if you’re taking a lot of trades each day, consider reducing this further.

Likewise, build into your trading rules some methods for stemming losses if you’re in a drawdown. You’ll find lots of ideas for this HERE.

3. React to changing conditions.

Don’t be afraid to admit that you’ve got something wrong. When we place a trade, along with a profit target and stop level, there are plenty of things that can happen in the market (between the target or stop getting hit) that might negate that signal.

It could be new data coming out, a technical indicator reading, or simply too much time passing without the trade moving into profit.

4. Don’t hang back.

Once you’ve got your plan, commit wholeheartedly to it. This doesn’t mean being reckless. Your plan needs to have contingency within in it for losing trades and losing runs.

The reality is that even the best traders (just like a skier in a white-out) don’t know what’s coming at them. But what they do have is the know-how to take anything the market throws at them in their stride.

And, if all else fails … bend your knees a bit more.

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