"Do not predict; react!"
Now this is something most people do not understand,
and I think that includes most of the so-called expert
traders. I will try to explain it over time, and in this
post I will give an example of what I call the perils
of price prediction. I will use the Euro June 2008
futures, which is why I posted the previous article
on the trendline break and suggested a trading idea.
I also made it clear I would not make the trade myself.
If you look back at the post "A classic trendline break"
I said to short it below the low of the break day which
was 1.5604. My target was the 1st Fib retracement level
of 61.8% at 1.54; the stop was the closing price on the
break day at 1.5651. What happened since then ?
Here is what -
Above is an hourly chart of the Euro covering the last
2 weeks. Notice 4/24 and then look what happened
thereafter. We would have gone short on 4/25 when it broke
the 4/24 low. The target 1.54 was reached on 5/1. A good
200 pip 1 week trade, the classic swing trade!
WAIT A MINUTE! No! Look at what happened on 4/28 ( the
dashed line ). The high ? 1.5663! I was stopped out for
a 60 pip loss!!
But wait! I actually was foreseeing some of this
due to the FOMC / end of month volatility. I had said
right at the end of my post that I would raise the
stop to where the 9-DMA stalls at 1.5672. So I was
ok after all.
Now the point is, does the fact that my first stop
failed but my second stop succeeded make me a trader
who could earn his living from trading?
The answer, my friends, is a resounding NO.
In investing, one can do certain things with price
prediction. In trading, it is a LOSING game. This is
why almost all traders fail.
I hope you have learned the perils of price prediction.
Its a coin-toss, no matter how good a technical analyst
or fundamental analyst you are. And I am a very good
one!
I will expand on this in various posts as I lead up
to the idea of reacting rather than predicting. It
forms the core of my trading concept utilising the
half-life of time.
Btw, what about that NIFTY? I had said it is approaching
200DMA resistance which always fails on the first try.
But we do NOT know when! Below is the latest chart. We
shall see what lessons we can learn from this particular
struggle as it unfolds over the next few days! For the
moment, look closely at the Wilders DMX, a very
valuable indicator for longer-term or trend traders.
It is congesting. You can study Wilders at Stockcharts
or any other good charting school.
Thanks for your viewership!
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