Is Trading Just Guessing?
- Thread starter macattack
- Start date
Good trading is educated guessing, meaning you've educated yourself about certain facets of market behavior and are prepared to act when the conditions are met.
For example, you've noticed that over two years' analysis of equities' price behavior following important news reports that whenever a heavily shorted stock breaks through a major previous resistance level it runs another 2% or more 95% of the time. You decide to place standing buy stops above the last major swing high of every liquid stock that has a short interest greater than 20%. That is an educated guess that will likely produce consistent profits for you when combined with prudent risk management principles.
Enjoy the fishing
Trading is trying to predict the future, and placing a bet on what will happen.
Without a Time Machine it's impossible to "know" what will happen in the future - unless you have "inside information" about an upcoming event.
So all one can do is choose what is "most likely" to happen, based on the past behavior patterns on the chart.
IMO, the most reliable thing to place bets on is The Trend, for whatever time frame you're trading.
The Trend is your "edge" - which means your odds of being correct are better than 50-50.
Though, having said that, I'm not sure exactly how much better than 50-50 they are.
Have there been any studies done on this?
Without a Time Machine it's impossible to "know" what will happen in the future - unless you have "inside information" about an upcoming event.
So all one can do is choose what is "most likely" to happen, based on the past behavior patterns on the chart.
IMO, the most reliable thing to place bets on is The Trend, for whatever time frame you're trading.
The Trend is your "edge" - which means your odds of being correct are better than 50-50.
Though, having said that, I'm not sure exactly how much better than 50-50 they are.
Have there been any studies done on this?
Quote from NoDoji:
Good trading is educated guessing, meaning you've educated yourself about certain facets of market behavior and are prepared to act when the conditions are met.
For example, you've noticed that over two years' analysis of equities' price behavior following important news reports that whenever a heavily shorted stock breaks through a major previous resistance level it runs another 2% or more 95% of the time. You decide to place standing buy stops above the last major swing high of every liquid stock that has a short interest greater than 20%. That is an educated guess that will likely produce consistent profits for you when combined with prudent risk management principles.
Enjoy the fishing
Educated guessing can be very costly and many people regret they ever started to educate themselves about anything related to trading.
Previous price movements in no way guarantee the direction of future price movements.
"What is the main difference between the two ways of guessing?"
Trading is a form of "gambling", so the word "guarantee" does not apply.
"Guessing" implies coin flipping decisions, which also doesn't apply.
But you can put the odds in your favor if you trade correctly.
If this weren't true, there wouldn't be traders who consistently win more than they lose year after year.
Of course this isn't easy to do, which is why only 5-10% of traders succeed in the end.
Well, its more like guessing unless you have it come down to an exact science.
Don't think it could ever be an exact science, because it's about probabilities, not about certainties.
You could just guess "Up", "Down", or "Sideways" for every stock you trade, without regard to technicals or fundamentals I suppose.
How well that would work I don't know.
Certainly wouldn't be as interesting or as much fun!
I wouldn't say so exactly sometimes things tend to happen exactly don't you ever wonder why it feels that way. We think our world is random, but yet it really has order otherwise they wouldn't be laws.