Most people make a big deal out of forex market prediction. They think they need to be right 70% or better in order to “pass” the exam that the forex market gives them. They also believe that they might get an “A” if they could be right 95% of the time. The need to predict the market steps from this desire to be right. People believe that they cannot be right unless they can predict what the market is doing.
Among our best clients, I have forex traders who continually make 50% or more each year with very few losing months. Surely, they must be able to predict the market very well to have that kind of track record. Well, I recently sent out a request for predictions and here is what I got back from some of the better forex traders.
Trader A; “I don’t predict the market, and I think this is a dangerous exercise.”
Trader B: “…these are just scenarios, the market is going to do what the market is going to do.”
Ironically, I got these comments from them despite the fact that I was not interested in any of their specific opinions, just the consensus opinion.
So how do they make money if they have no opinions about what they market is going to do? Well, there are five critical ingredients involved:
1.They follow the signals generated by the system.
2. They get out when the market proves them wrong.
3. They allow their profits to run as much as possible—meaning they have a high positive expectancy system.
4. They have enough opportunity so that there is a great chance of realizing the positive expectancy any given month and little chance of having a losing month.
5. They understand position sizing well enough so that they will continue to be in the game if they are wrong and make big money when they are right.
Most forex traders, including most professionals, do not understand these four points. As a result, they are very much into prediction. The average Wall Street Analyst usually makes a large six-figure income analyzing companies. Yet very few of these individuals, in my opinion, could make money trading the companies they analyze. Nevertheless, people believe that if analysts tell you the fundamentals of the marketplace, someone can use that information to make money.
Others have decided that fundamental analysis doesn’t work. Instead, they have chosen to draw lines on the computer or in their chart book to analyze the market technically. These people believe that if you draw enough lines, and interpret enough patterns, you can predict the market. Again, it doesn’t work. Instead, cutting losses short, really riding profits hard and managing your risk so that you continue to survive is what really makes you money. When you finally understand this at a gut level, you will know one of the key secrets to forex trading success. In the meantime, we will continue to make predictions in our column, so that you will begin to understand that they are entertaining, but nothing more!
Originally written by Van K. Tharp PHD
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