Tuesday, January 27, 2015

Should Traders forecast the Future?

What is the task of technical traders?

Here are two different answers.

ONE: To forecast the future price movements based on technical analysis.


TWO: To initiate trades based on technical setups, then manage the trades on the basis of accepted principles of risk and money management.

Well, for me, answer TWO, seems correct.

Barry Ritholtz, blogger of the Big Picture, has written a blog post, titled: forecasting is marketing. You can read it here.

Barry says:

I come not to praise forecasters but to bury them.

After lo these many years of listening to their nonsense, it is time for the investing community — and indeed, the seers themselves — to admit the error of their ways. Most forecasters are barely cognizant of what happened in the past. And based on what they say and write, it is apparent (at least to this informed observer) that they often do not understand what is occurring here and now.

So there’s no reason to imagine that they have the slightest clue about the future.


So, what should you be doing?

Mr Ritholtz has a suggestion:

What should investors do instead of paying attention to these unsupported, mostly wrong, exercises in futility called forecasting? I suggest three simple things:
1) Have a well-thought financial plan that is not dependant upon correctly guessing what will happen in the future.
2) Have a broad asset allocation model that is mostly passive indexes. Rebalance once a year.
3) Reduce the useless, distracting noise in your media diet.
It is important for investors to understand what they do and don’t know. Learn to recognize that you cannot possibly know what is going to happen in the future, and any investment plan that is dependant on accurately forecasting where markets will be next year is doomed to failure.
Never forget this simple truism: Forecasting is marketing, plain and simple.


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