Prediction is wrong.

'Prediction' is a word commonly seen on Tradingview and other places. Quite often people go, "Nice prediction!" when price moves in favour of some setup that was previously shared - and delivers profits. This use of the word or concept of prediction is wrong for a number of logical reasons.

Not because I say that B will follow A, and B happens means I've predicted anything. I could also predict that the sun will rise in the East tomorrow or next year, but I doubt anybody would see value in that. I could 'predict' that if you drop an ordinary glass tumbler on a hard concrete-floor, that it would shatter. Nothing great in that either. Why? Because everybody knows about those situations. They know the probability in advance. In addition, 'value' is important in what people call prediction. Few are impressed by meaningless so-called 'predictions'.

There is phenomenon of 'adventitious reinforcement' that affects many traders (unknowingly). For more on that see Predictable Peckers and similar on the net. That's not just about pigeons. People too can come to believe that their actions 'predict' what happens next, and then they behave or act in certain ways. Any rewarding outcome can be associated with a previous action and developed into a pattern. So - in trading, the seeming correct prediction reinforces a belief that the outcome was due to something in the setup that brought success. These beliefs are almost never statistically analysed and in any case, traders are not interested - which is very sad.

I removed 'prediction' from my lexicon when trading. In my analyses, I focus on probabilities. Yes I use technical analysis and chart patterns. In other situations, I simply assess the trend for time momentum and price momentum, then estimate probabilities. I know that for any estimate I make which may be as low as 51% there is a reverse probability of 49%. If 60% then the reverse is 40% and so on.

There is no surprise or reinforcement when my entry position is successful and delivers rewards. I predicted nothing. All I did was get the probability right on those occasions.

Especially in trend-following trades the estimate of probable direction is particularly important. About 3 years ago I missed a trend following trade that was shown live because I couldn't believe how far it might go. That trade delivered a staggering 600 points. My question to the expert was, "How did you know it would go so far?" (as if he predicted it). I thought he knew the future. He just explained that he followed his strategy. But he didn't really answer the question. With more experience, I now know that he predicted nothing, for the simple reason that he was just following.

Trades with predefined targets create expectations and are more prone to leading traders to a belief that they can predict. The harsh reality is that nobody owns the future and can predict anything. All humans can do is estimate probabilities.

Tip of the day: if you're shorting anything do it at the peak of something to minimise risk of being scalloped. [Different perspective on the virus ]


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