Predicting The Market

[Citizen2007]

I keep reading on these boards and some websites that no one can predict the market. I would like to open this up for discussion if i may.

When you say you cannot predict the market, what EXACTLY do you mean?

Are you saying that it is impossible to know which direction the market will go to?
Or what price the market will go to?
How do you differentiate between forecasting and predicting ?
How and why do you enter a trade if you have not made some sort of prediction about price?

Is the word predict in need of a clerer definition when referring to the markets.


I raise this question because i was reading a post on this board about a ftse strategy. It began with the line that no one can predict which way the FTSE will go. That being the case, you would trade the FTSE with a PROBABILITY based system, maybe looking for indicators to give bias to your decision .

Isn't that a bit like tossing a coin ?

Comments appreciated.

 

[Trader333]

How and why do you enter a trade if you have not made some sort of prediction about price?

There are those who "claim" that they are able to predict price or market direction but there has been no substantial evidence from anyone I am aware of that has proved this.

This means that most of us use statistical probabilities when entering a trade. By this I mean that we know that there is a higher probability of a profitable trade than a loss being incurred for a particular setup being used but it is still possible a loss will happen. If markets or prices were as predictable as some claim, then everyone would be using the same approach which in itself would negate the success of the approach. A trade can only work if someone buys at the same point as someone else sells. If everyone wants to buy then there would be no one to buy from as there would be no sellers.

If you come across anyone who claims they have the ability to predict the market then challenge them to a simple test. Ask them which market they can predict and then ask them to predict the price of that market 2 hours into the future on 3 separate occasions. I think you will find they cannot do it.

In my view, it is precisely the fact that markets cannot be predicted with certainty that makes it possible to be a profitable trader in the first place.


Paul

 

[Citizen2007]

Hello Paul,

Thank you for your reply. When you say that you use statistical probabilties, are you saying for example if you go long, based on these statistical porbabilities, you are still uncertain that it may go up?

Isn't trading with the trend a way of saying or 'predicting' that the move will go in a particular direction?


"If you come across anyone who claims they have the ability to predict the market then challenge them to a simple test. Ask them which market they can predict and then ask them to predict the price of that market 2 hours into the future on 3 separate occasions. I think you will find they cannot do it."

When a position is held for several hours, waiting for price to reach a certain s/r level, is this not a prediction of the market as such?

Thank you

 

[Paul71]

Hi guys.

I think it's fair to say that the markets actually evolved because of unpredictability, therefore why should the markets be 100% predictable?

Or...

Does predictability depend on the individuals choice of market, style, money management technique and timeframe?

In what context should predictabilty be assumed?

 

[alexander]

When you say you cannot predict the market, what EXACTLY do you mean?

This is the easiest question to answer for anyone who understands how markets work. Predicting the market is equivalent to predicting how the actions of the various participants of the market will affect price. But:

(1) Nobody knows who and how many are involved in the market at any given time

(2) Nobody knows what the participants will do in the future or even next second

(3) Nobody knows the flow of information in advance or even how it will affect prices

(4) Nobody knows who are the bluffers, who are the value investors and who are the recreational participants.

Add (1) to (4) and the result is a non-deterministic stochastic process with a high noise component. Do you want to try to predict it?

Alex

 

[brutusdog]

unperdictable

There are those who "claim" that they are able to predict price or market direction but there has been no substantial evidence from anyone I am aware of that has proved this.

This means that most of us use statistical probabilities when entering a trade. By this I mean that we know that there is a higher probability of a profitable trade than a loss being incurred for a particular setup being used but it is still possible a loss will happen. If markets or prices were as predictable as some claim, then everyone would be using the same approach which in itself would negate the success of the approach. A trade can only work if someone buys at the same point as someone else sells. If everyone wants to buy then there would be no one to buy from as there would be no sellers.

If you come across anyone who claims they have the ability to predict the market then challenge them to a simple test. Ask them which market they can predict and then ask them to predict the price of that market 2 hours into the future on 3 separate occasions. I think you will find they cannot do it.


In my view, it is precisely the fact that markets cannot be predicted with certainty that makes it possible to be a profitable trader in the first place.


Paul

spot on, don't think you will find a more adept answer than this.

 

[Citizen2007]

This is the easiest question to answer for anyone who understands how markets work. Predicting the market is equivalent to predicting how the actions of the various participants of the market will affect price. But:

(1) Nobody knows who and how many are involved in the market at any given time

Are you referring to the herd or professionals? I

(2) Nobody knows what the participants will do in the future or even next second

Is it not right to assume that their are ways of monitoring professional activity, thus allowing you to ghost their actions of buying or selling?

(3) Nobody knows the flow of information in advance or even how it will affect prices

What about the Market Makers who control order flow ?

(4) Nobody knows who are the bluffers, who are the value investors and who are the recreational participants.

Does the bluffing really count ? For every bluff order, the trader must place orders on the other side ? Not sure if this is how they do on level 2, just an assumption .

Add (1) to (4) and the result is a non-deterministic stochastic process with a high noise component. Do you want to try to predict it?

So how would you place a buy trade or a sell trade with more certainty than 50% ?
Alex

Thank you

 

[Citizen2007]

spot on, don't think you will find a more adept answer than this.

Paul has covered an angle of this topic which no doubt exists in the mind of traders. What i am trying to find out is the definition traders give to 'predict' when analysing markets.

I am of the opinion that if am going long then i have an understanding that the market is going up, and it will go up to a certain resistance level, where i can expect a reaction or something. When i or anyone else trades in this manner, am i not predicting that the market will go to level A or predicting that the price will rise ?


Thank you

 

[nine]

There are a lot of these can/can't predict arguments.

You usually find that the moderates on both sides just have different definitions of predict (the extremists are often simply nuts).

If one says that one can not with 100% certainty predict that a market will be at X at time Y then most will agree.

If one says that one can predict that if you take setup CC then there is a 65% probability that it will move forward 15 points before it moves back 8 points then (assuming that the person stating it isn't an idiot) then many will agree (most traders should as we almost all rely on such relationships to make money).

In both cases a prediction is made.

The other "don't predict argument" is the "you follow the market, you don't predict where it's going" and this group, in the extreme as seen in the Grob followers at ET is more difficult to deal with ... because, frankly, Grob is mad and they've joined his collective insanity. But the reality of their argument is that there is a psychological benefit in not believing that one is predicting - if one doesn't believe one has made a prediction then one is not attached to the result and is more able to see the opposite case develop in the market. This is a good reason but does result in some stupid flaming matches at ET.

The best approach is to combine an understanding that all market predictions should be statistical in nature (X% chance of Y before Z (ie hit the target before the stop)) and an understanding that humans are biassed to be attached to their commitments (their directional predictions) so you need to nullify any bias you develop when you put a position on.

Here endeth the sermon.

 

[brutusdog]

Paul has covered an angle of this topic which no doubt exists in the mind of traders. What i am trying to find out is the definition traders give to 'predict' when analysing markets.

I am of the opinion that if am going long then i have an understanding that the market is going up, and it will go up to a certain resistance level, where i can expect a reaction or something. When i or anyone else trades in this manner, am i not predicting that the market will go to level A or predicting that the price will rise ?


Thank you

in a word no. i would say that a success full trader would base taking a trade on probability, that probability would be gained from studying testing and analysing a particular market or method.

when a trade is taken the trader is not predicting the direction but saying by entering the market here i have more chance of it moving in one direction than the other. no one can be sure this is the case.

for me to say something is predicted is to have an emotional attachment to a particular view as you are taking away the subjective element.

 

[jacinto]

predict a market....what for?

better to wait for a signal and ride the wave.

 

[Crap Buddist]

Marketology. Observing The ebb & Flow Of Money.

I look at it like this or see it like this. The market is like a dynamic ocean. With *tides & waves. I focus on or want to because I see it, focus on developing my skill in being able to observe ,sometimes very subtle and other times storms of tide changes within the market.

When we can observe the *tide and its direction, the next task or focus of observation can be shifted to the waves, which sit upon the tide.

Is that prediction..? Well in the sense if you know the tide then you can predict the direction of the waves and because the tide is known , the direction of the future waves will be powered along by the present tide.

Then theres the El nino effect. Violence. The tides can change quickly or the force of waves can alter the tide.

So I'd call this approach to trading,


Marketology. Observing The ebb & Flow Of Money.

CB




*Market &Tides, read market Intent.

 

[Profitaker]

The efficient market hypothesis says that stocks are always correctly valued because everything that is publicly known about the stock is reflected in its current market value. If this is true then future prices must be unpredictable. I’m a firm believer in the efficient market, certainly in the large cap stocks and to a lesser extent in the smaller caps.

But it’s difficult to prove, one way or the other, because the skeptics will always point to some methodology that has worked for them, or others, and made a lot of money. My retort would be that if you mine enough data you will inevitably find a correlation between the markets and almost anything, including astrology, or moon cycles, or any other unlikely phenomena you care to mention. Any form of mechanical trading system, based on whatever principle, will have worked at some point in the past, and therein lies the problem.

If you think about it, if the markets were predictable then how could there be a market ? For example, if everybody agreed that BP would trade at 600 on Monday then BP would have traded at 600 on Friday. And if everybody agreed that BP would trade at 600 on Friday then BP would have traded at 600 on Thursday. Of course this never happens because it is precisely the disagreement between buyers and sellers of where a stock will trade that causes stock prices to change, and in doing so create a market.

And if stocks themselves are unpredictable then the notion that an index is predictable is nothing short of fanciful. For example, take an index with 100 stocks, each of different weightings and each with different correlations, like the FTSE100. If BP goes up 1% but BARC and TSCO both go down 2% then the index stands unchanged. VOD up 2% PRU up 5% and BAY down 6% and the index rises 25.4 points and so on…..
If one cannot predict where one stock will trade, then how on earth could anybody predict where 100 stocks will trade simultaneously ???

But, if BP traded at 600 on Friday, then which price is more likely on Monday – 610 or 620 ? If BP traded at 600 on Friday then which price is more likely next Wednesday – 595 or 632 ? It is the use of probabilities such as those above that can make money in the markets.

p.s. Anybody care to speculate as to the probability that this thread gets ruined by a certain purple individual ?

 

[Citizen2007]

I look at it like this or see it like this. The market is like a dynamic ocean. With tides & currents. I focus on or want to because I see it, focus on developing my skill in being able to observe ,sometimes very subtle and other times storms of tide changes within the market.

When we can observe the tide and its direction, the next task or focus of observation can be shifted to the waves, which sit upon the tide.

Is that prediction..? Well in the sense if you know the tide then you can predict the direction of the waves and because the tide is known , the direction of the future waves will be powered along by the present tide.

Then theres the El nino effect. Violence. The tides can change quickly or the force of waves can alter the tide.

So I'd call this approach to trading,


Marketology. Observing The ebb & Flow Of Money.

CB

Thank you CB. That is a good analogy of the topic.

Just a copy from my journal:

" I have been trading for many years now and up until a few months ago, I used to trade having a system of underlying indicators, that when they all lined up, I would enter. Not really having any idea of direction or anything, just a set of rules I followed, and hoping that these conditions would be present in today’s market so I could put on a trade.

Then through more searching (both soul and research) I began to look at the market another way, one that allowed me to determine market direction. I then began to realize that I could 'read' what the markets were doing. This allowed me to asses what phase the market was in and thus how it is likely to move for the next trade.


Although Barry with the use of price action is able to trade or understand market movements throughout the day, assessing the viability of each trade beforehand, I am unable to use price movement to that extent. Therefore my search for a suitable indicator continues for now. "


Thank you

 

[alexander]

1) Nobody knows who and how many are involved in the market at any given time

Are you referring to the herd or professionals?

Both

(2) Nobody knows what the participants will do in the future or even next second

Is it not right to assume that their are ways of monitoring professional activity, thus allowing you to ghost their actions of buying or selling?

You forget ATS, dark pools and ECN's that allow anonymous orders.

(3) Nobody knows the flow of information in advance or even how it will affect prices

What about the Market Makers who control order flow ?

Order flow is different than information. It is true that market makers who have a better view of order flow have an advantage over retail traders. But being a market maker is both costly and risky.


(4) Nobody knows who are the bluffers, who are the value investors and who are the recreational participants.

Does the bluffing really count ? For every bluff order, the trader must place orders on the other side ? Not sure if this is how they do on level 2, just an assumption .

Bluffing is a major issue but one that is grey line and exchanges cannot anything about it or very little. How would you know when a big house is on the buy side that they are really looking for value or for pumping and then dumping?


Add (1) to (4) and the result is a non-deterministic stochastic process with a high noise component. Do you want to try to predict it?

So how would you place a buy trade or a sell trade with more certainty than 50% ?

A good system can bring luck to your side

Alex

 

[Crap Buddist]

Thank you CB. That is a good analogy of the topic.

Welcome. And its just one approach. But makes great sense, to me anyway.

What can be tough or long, or as long a process on top of observational skills is the indivuals ability to sail the actual oceans.

We are the vessel, the captain, the crew, the lifeboat. Etc. All of it. When the observations of the tides and waves come in to view the next task is for us to skipper our vessels, sail solo around the world, in all seas. ALL seas? why not?

How long would it take a captain to gain that experience of sailing in all seas under all variable ever changing conditions? . It might be tough but least then we should be able to cope with any situation .

Takes time to gain the experience to learn to be able to cope in all conditions. I'm still going through it and I expect you / we never stop learning.

How we usually start off maybe ,can be likened to setting sail around Cape Horn in an inflatable tractor tyre with an outboard motor on . Baptism of Fire.

What I think is a level on again from that lot, is or are the tip top of the top who can pin the troughs and the peaks of the waves and catch the tide as it turns.

Another league again & something to aim for maybe.

Just my look on things, and I expect there are many approaches to trading and I think half of the battle is also knowing what approach is the correct one to use.

All the best.

 

[Profitaker]

Paul

Interestingly, the options market prices in a 50/50 probability of an up or down move in the underlying. It doesn't matter how high or low a stock has gone, at-the-money Puts and Calls of the same expiry are worth the same in the market place (discounting finance). That should tell the efficient market doubters something.

The 3rd dimension - volatility - let's all buy options

 

[new_trader]

The efficient market hypothesis says that stocks are always correctly valued because everything that is publicly known about the stock is reflected in its current market value. If this is true then future prices must be unpredictable. I’m a firm believer in the efficient market, certainly in the large cap stocks and to a lesser extent in the smaller caps.

But it’s difficult to prove, one way or the other, because the skeptics will always point to some methodology that has worked for them, or others, and made a lot of money. My retort would be that if you mine enough data you will inevitably find a correlation between the markets and almost anything, including astrology, or moon cycles, or any other unlikely phenomena you care to mention. Any form of mechanical trading system, based on whatever principle, will have worked at some point in the past, and therein lies the problem.

If you think about it, if the markets were predictable then how could there be a market ? For example, if everybody agreed that BP would trade at 600 on Monday then BP would have traded at 600 on Friday. And if everybody agreed that BP would trade at 600 on Friday then BP would have traded at 600 on Thursday. Of course this never happens because it is precisely the disagreement between buyers and sellers of where a stock will trade that causes stock prices to change, and in doing so create a market.

And if stocks themselves are unpredictable then the notion that an index is predictable is nothing short of fanciful. For example, take an index with 100 stocks, each of different weightings and each with different correlations, like the FTSE100. If BP goes up 1% but BARC and TSCO both go down 2% then the index stands unchanged. VOD up 2% PRU up 5% and BAY down 6% and the index rises 25.4 points and so on…..
If one cannot predict where one stock will trade, then how on earth could anybody predict where 100 stocks will trade simultaneously ???

But, if BP traded at 600 on Friday, then which price is more likely on Monday – 610 or 620 ? If BP traded at 600 on Friday then which price is more likely next Wednesday – 595 or 632 ? It is the use of probabilities such as those above that can make money in the markets.

p.s. Anybody care to speculate as to the probability that this thread gets ruined by a certain purple individual ?

I don't agree entirely with this. BP might trade@ 600 on Friday. My question would be what would make someone buy a 10,000 shares on Friday but not on Monday? There are many threads devoted to Volume yet you make no mention of it in your post. Who really cares about price? The public. Who is it that knows nothing about what insiders are doing? The public.

 

[Profitaker]

I don't agree entirely with this. BP might trade@ 600 on Friday. My question would be what would make someone buy a 10,000 shares on Friday but not on Monday? There are many threads devoted to Volume yet you make no mention of it in your post. Who really cares about price? The public. Who is it that knows nothing about what insiders are doing? The public.

My question would be what would make somebody sell 10,000 BP shares on Friday but not Monday ?

What's volume got to do with predictability ? For every buyer there has to be a seller. Volume is just a volatility generater, that's all. Volume isn't directional.

 

[Paul71]

Paul

Interestingly, the options market prices in a 50/50 probability of an up or down move in the underlying. It doesn't matter how high or low a stock has gone, at-the-money Puts and Calls of the same expiry are worth the same in the market place (discounting finance). That should tell the efficient market doubters something.

The 3rd dimension - volatility - let's all buy options

Hi, PT.

You obviously read my comment about options time before i deleted it. Selling options and predictability...mmm..., you just never know, it's not like everything is known in advance....every bloody numb skull would be at it.