The Art of Forecasting

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Forecasting techniques make it easier for a trader to develop a directional bias, anticipate changes in a trend, and pre-plan strategies. When we develop a *bias*, it must be understood that it is solely for the purpose of planning a strategy to implement if a certain scenario unfolds.
We must be careful not to attach too much energy and emotion to a bias for the purpose of being *right*. Our goal is to make money by planning for possible scenarios – regardless of a market direction.

Analyzing market direction and incorporating forecasting techniques does not seem easy at first, and as such, is ignored by many traders. It takes some time and effort to learn. However, the more aggressive traders tend to gravitate towards these methods, knowing full well that hard work and better tools will pay off in the long run.

The serious and committed trader that is willing to put in the extra time and effort to prepare for opportunities well in advance uses the art of forecasting to gain an edge over the majority of traders looking for an easy way out. Once basic forecasting techniques are learned, it becomes an easy exercise to identify low risk opportunities, available every single trading day.

The goal of forecasting is to make money, not be right or wrong.

Too many traders that emphasize forecasting into their approach get caught up in trying to pick the exact H or L of a move. They think that the objective is to be correct in calling the market. A proper trading strategy and recognition of a market turn as it happens or shortly after the fact is much more important than being precise. It is important to be long when the market is going up, and short when the market is going down. That is how money is being made. Forecasting is meant to put the trader on extra alert to a possible trading opportunity. No more, no less.

Don’t worry about being wrong. Focus on profits.

One of the things I like about forecasting is that being *wrong* can sometimes identify profitable opportunities. If I expect a continuation of a trend off a critical support or resistance level, and the market trades through this level and proves my forecast wrong, this may well be a significant breakout or change in trend. This is valuable info that can open up a low risk trading opportunity utilizing another strategy. I have always been satisfied with the accuracy of my forecasts, but I pride myself more in making money regardless of market direction or whether I am right or wrong.

Forecasting allows me to anticipate market behavior in advance, but my fundamental attitude remains the same. I like to react to unfolding market conditions, regardless of a forecast. Being in a reactive mode frees me from being emotionally attached to a bias and allows me to tune into the *here and now*. Being able to harmonize and flow with the market is always the path of least resistance, so I don’t ever want to get attached to any particular forecast.

Do your homework the night (or week) before you put on the trade.

The best time to think, plan, and crunch numbers is when you are not under any pressure to perform or trade. This is the time to plan strategies in anticipation of several possible scenarios: to isolate key price levels or time zones. In the excitement of the trading day emotions like fear, anger, or greed can easily cloud our judgement. We need to preserve our psychological energy for implementing the trading plan, not for devising new strategies.

When these emotions dominate our consciousness, it becomes very difficult to formulate a new strategy in an objective manner. Formulating a new plan during the day can only be done objectively after you have been conditioned to be free of the subtle influences of the markets. This takes a lot of time and experience. Until that level of trading proficiency is reached, it is always best to pre-plan your strategies and stick with it.

I like to crunch all my numbers the night before I trade. I also like to write out the strategies I will implement if various scenarios unfold, and then I like to sleep on it. The next day I am fresh and ready to trade in any direction – with an arsenal of strategies and minimal stress.