Be a market agnostic
Posted by Danny on November 18, 2013
A lot of investors think they can only profit by correctly predicting where the market is going to go next. But some investors are actually doing very well by simply going along with what comes along. They follow the market rather than trying to predict where it will be next month, next year… More on that below.
Let’s first have a look at what the S&P 500 did last week (click for larger image):
The S&P index has once again turned up after a very brief pullback. My Earl and MoM indicators have turned up as well. This means we are already in the midst of another leg upwards.
We will have the start of a lunar green period later this week. So, the stage is set for a further climb towards 1850 by December.
Notice how since April all market advances have come at identical upward slopes. At this rate of change the 1850 level can be reached by the first week of December, and overhead resistance is currently found around 1870.
Looks reasonable, but does that mean this market scenario is highly likely to come true? Of course not. We can look at indicators, we can study cycles, we can draw trendlines, we can read the opinions of various market analysts, .. but at the end of the day the market may still surprise us by doing something else.
That’s why it is important to be agnostical towards all market forecasts, including the ones you find on this blog.
Trading can be compared to a game of tennis. The opponent may hit the ball to my left or to my right. But I don’t win tennis matches by trying to forecast where the opponent is going to hit the next shot. I can only win tennis matches by being quick to respond to the shot as soon as I can see how the ball has been hit. Even if the opponent is hitting to my forehand side 70% of the time, moving towards that side before the shot is hit would put me at risk of being wrong-footed.
It is the same in trading. It is useful to anticipate what market moves are likely to follow, that’s what I can use indicators and cycles for, that’s what reading other traders’ opinions can be used for. But it is better not to commit to bull or bear side until I can clearly see which way the next shot/move is actually going. That is: go along with what comes along.
If I believe too strongly that the next move will be bullish or bearish, then I put myself in an unfavorable position. Then I am likely to be slow to respond if the market happens to go the other way. Then I will be wrong-footed, which usually means a much bigger loss than the trader who was watching things from a more agnostic point of view.
The market is usually full of surprises. First it may surprise investors by going where almost nobody was expecting it to go. And then, when enough investors have gotten on the contrarian bandwagon, it surprises them by going where almost everybody was expecting it to go. Rinse and repeat.
The market agnostic is in the best position to be ready for any situation. He doesn’t need to predict what will come next, he waits until he can see what is coming next. He is in the now, not in the future. He will also err from time to time, but not as often as the person with a strong conviction either way.