What is the difference between expectation and forecasting?

There are many signaling services, newsletters and trading rooms that offer forecasts for the coming days, weeks and months of what the market will do. This is a very tempting offer to reassure subscribers about what is to happen in the market. Some believe that it is possible to see what the market will do and subscribers really follow these services. Unfortunately, predictions do not exist, even if these advisers are clairvoyants. No one can make the right predictions even 50% of the time constantly, the market is either rising or falling.

When traders predict what the market will do, is it the same as the forecast? The forecast is to declare that something will happen in the future with only one result, while the expectation is to think in advance about all possible results. The wait requires dealing with the problems before they arrive; the forecast expects something to happen without us dealing with it. Predictions tend to take a bias or position, while anticipation requires careful consideration of what might happen: good or bad.

An example of expectation is when a trader observes prices rising and approaching an old level of resistance. He expects prices to continue or reverse. He needs to prepare to deal with both scenarios. One is to prepare for a breakthrough and continue upwards, he must determine at what price he will continue and where the stop loss will be placed. If prices change, he must determine where the short entry will be, as well as the stop loss. These scenarios prepare him for the next price movements, predicting what other traders will do when prices reach the level of resistance. If he predicts what prices will do, say, they go up and keep going up. He has no plans for a possible turnaround. It focuses only on the upward trend, not on possible reversal or consolidation. These scenarios need to be constantly considered and planned, as markets are constantly evolving. This mentality makes a huge difference between a successful trader and a losing trader.

Prediction is a game of losers that feeds the need to be right instead of making money. The ego is often the culprit to show other traders how good it is at predicting market direction. In trade, ego and profitability cannot coexist. If it is not the ego, most traders will look for one direction and then use evidence to support that bias, ignoring the evidence that can support the opposite direction. This bias predicts the future. It tends to carry thinking until after the trade has taken place. It may be a profitable trade, but in the end the trader is so convinced of this bias that when the trade fails, he will have no alternative to prepare for the loss.

One of the desired traits of a successful trader is his ability to prepare for all possible results by imagining the scenarios that the market can make, up or down, before the trade takes place. He knows he can’t predict, but he can calculate the probabilities that the market will go one way or another. In anticipation of the result, he has a plan for one result or another. What happens if the market goes against its position, where will it go? What happens if the market goes in favor of its position, where should it go to make a profit?

The expectation is preparation for both results, good or bad. Calculating how much to lose is just as important as how much you expect to gain. This means that the trader will identify in the chart where he will see the entry point and two exit points (stop loss and profit target). By possessing this method, he can identify his risk / reward ratio as well as the probability of trading success.

So how do we overcome this dilemma? Probabilities can be found by rigorously testing historical data based on the strategies the trader plans to trade. Finding statistics to support his idea that the strategy works will give him confidence in his approach to the market and give him an attitude to predict rather than predict the results. One way is to see the market as it shows us either by price action or by indicator.

Recognize that prices or indicators can change direction at any time. Using statistics to make a reasonable assumption, the trader can find out in which direction the market is likely to go. But probability cannot guarantee the desired result. This means that there must be a contingency plan, ie. stop loss in case the desired result does not occur. This is the reason why successful traders have a stop loss at their disposal. Stop loss is a decisive factor that determines whether the result worked or not. The trader must accept that the market will always be right and trying to be right will prevent the trader from being one with the market and going with the flow.