I recently watched a documentary about the Veeries – a type of bird in northern North America. A research study has shown that the Veery can predict the severity of the hurricane season better than the meteorologists, months ahead in time.
Unbelievable right? But it’s true…
There is a strong correlation between, how soon or late in the year the Veeries would migrate from North America to South America and the severity of the hurricane season in that year.
Scientists who studied these birds found this correlation and the data to support the claim, not Meteorologists!
What does this have to do with predicting stock, forex, or cryptocurrency markets? Everything!
Well, the Veeries sure can’t predict the markets. But the point here is that prediction methods exist even for the supposedly unpredictable weather, months ahead in time as well.
You just have to find the right tools and methods to increase the probability of predictions – famously called the “edge”.
Find your Veery
The markets may be random. But it doesn’t mean complete chaos. We know for a fact that price on any market flows in repeatable patterns.
The “impulse – correction – impulse” combination is the most basic pattern. Trading cannot be any simpler than looking for the end of an ongoing corrective phase in the market.
Since we’re discussing market prediction, one may ask if market fundamentals can be useful in the course.
It is a fair argument. But there’s a huge flaw in trading with fundamental indicators such as interest rates, GDP, and unemployment fluctuations in the forex market.
The problem is that the price fluctuation in the context of time does not correspond to the fundamental indicator (at least in the forex market).
Although GDP is a quarterly (and annually) issued statistic, the effect of the announcement or the actual GDP figure itself, never lasts more than a few hours or a few days at maximum, let alone 3 months.
So the GDP number would not predict anything. The news is just a blip in the forex market.
Even if it would predict the direction, it would affect the market only for a short period. Much shorter than the period until the next GDP indicator will be issued.
If it’s not the fundamentals then we’re left with only one option – technical analysis.
Components of a proper market prediction
There are two dimensions to every financial market – price and time.
So a proper market forecast should include both aspects. Traders quite often overlook the time axis on the chart.
This is because of the perceived concept that only price affects the profits or losses of trades. This cannot be any further from the truth! It is a mere illusion that the time axis doesn’t affect profitability.
If you do not account for the time factor of the trades, then you’re missing a big piece of the puzzle. Perhaps it is the only missing piece in your trading strategy.
Nonetheless, price is still the most critical component.
1. Direction and capacity of Price
If all trading strategies, systems, and methods mainly focus on one thing only, it is price prediction indeed.
This involves an entry price level (or zone) and an exit price level (or zone). But strategies based on technical indicators depend on the signals produced by those indicators.
In this case, the prediction involves ambiguous price levels. Whether your strategy predicts specific price levels or awaits indicator signals, forecasting the direction of the price is a must. This is obvious though.
Mainly there are 3 types of approaches to forecasting price (technical analysis)
- Purely based on indicator signals and the confluence of multiple signals (objective approach)
- Automated trading (objective approach)
- Analyzing recurring chart patterns with minimal use of indicators (highly subjective)
Due to the human element, the analysis of chart patterns is highly subjective. Forecasting with Elliott waves and harmonic patterns belongs to this category.
Understandably so, pattern trading needs quite a bit of practice and a trained eye to master. But once you do, there’s no mechanical indicator that can match the outcome.
2. Expectation of Time
At times you do everything correctly according to your strategy but the trades either go haywire against you or stay stagnant with little to no movement.
If this happens too often, it’s a clear sign that your strategy has little or no consideration of the time axis.
Trading strategies must have time-based rules at the very least, for entry, duration, and exit. Intraday trading strategies can have these rules outlined in hours and swing trading strategies in days or weeks.
In general, the time-based rules will allow you to get rid of non-performing (possible losers) very quickly. The main purpose of any strategy is to predict the direction of the next impulse wave, and the time-based rules will help to filter out the possible false signals.
In conclusion, the key to predicting a financial market is to understand the dynamics of the market itself.
Sometimes you need to explore new ideas and think out of the box to find your Veery. When you find that edge in the market, make sure to incorporate a rule-based approach to trading.
When you do all those basics right, then you would be already predicting the markets, after all, that is your job as a trader – predicting the financial markets.