Do Trading Forecasts Work?

Jan 6, 2020

Vijay Bhambwani, Editor, Fast Profits Daily

Hi,

This is Vijay in the Fast Profits Daily.

I hope you enjoyed the first weekend of the new year!

Now let's get back to making fast profits in the market.

Today, I want to cover an important aspect of trading which effects every trader: trading forecasts.

  • Do they work?
  • Should you listen to them?
  • If not, then what is the alternative?

Find the answers in today's video. Enjoy!

Hi, this is Vijay Bhambwani and I am back with you again to talk about a very critical aspect of trading: Do forward projections really work in training?

Please do remember, I am talking purely about trading and not about long-term investing.

The life of a trader is not an easy one. There are so many imponderables, variables, and news flow which can impact prices and basically act against you in the near term.

And yet, you will hear so many forward targets being put out in the public domain, in the media, social media, etc about how the market will be at so and so level by so and so time frame and then xyz level in another xyz time frame. Is it really as simple as that and is it really effective?

Now there is a school of thought in financial markets which believes in the efficient market hypothesis put forth by Eugene Fama, a well-known university professor in the United States of America.

The Eugene Fama theory, called the efficient market hypothesis, believes that all market participants are rational human beings. They act mathematically and they have all the knowledge that is required to basically trade or invest in the market and therefore everybody behaves rationally.

Unfortunately, this happens to be true only in classrooms. In the real world, we are emotional human beings, who are susceptible to fear, to greed, to worries, and to anxieties. Which is to say that we are not 100% rational and therefore, when things start to go against us, we succumb to emotions and then, we take knee jerk reactions.

Now this is the imponderable or this is the unpredictable aspect of the market, which can hit your trade and any given point in time. To that extent, is it very logical to put out medium to long-term targets for your trades?

I would beg to differ. Let me give you a real-world example.

If I was to collect a few people in a very different kind of a race. The race is, to climb the stairs of a 15-story building. If I was to allow you to take a break at the 5th floor, the 10th floor, and then finally stop at the 15th floor.

If at all, everybody managed to climb to the 5th floor, the first stop, in two minutes, is it logical to say that everybody would be able to climb to the 15th floor in six minutes, which is three times of two minutes?

You would obviously say, hey, that's not possible because the 1st five floors were the easiest to climb. The second batch of five floors, the climber would be a little tired and in the third set of five floors, your knees and your thighs would start to swell. Your lungs will ask for more and more oxygen. You would be breathless. You would be sweaty and therefore, your climb would be slower.

Welcome to the markets!

This is why linear extrapolation, this is a statistical term, linear extrapolation is saying that if a moving body took X amount of time to move from point A to point B, it will take exactly the same amount of time to move from point B to point C, and then the same amount of time to move from point C to point D, which is why the efficient market hypothesis does not really work in the market.

So in trading, there is something called the force of gravity. The further the security moves higher, the slower will be the ascent or the climb. You basically will have to account for that. Which is why, linear extrapolation or simply saying that because the Nifty rose 50 points every day for the last two sessions, it will rise by 50 more points in tomorrow's session, is a faulty presumption.

Take each day as it comes and do not listen to the efficient market hypothesis blindly.

What is the cure for having to trade in a market which is so uncertain?

I would say, keep your eyes glued on to your trading terminal and keep your snap quote window on at all times.

Your snap quote window pops up any time you highlight a security and click on F5. This is your trader's cockpit.

Keep noting how the prices are moving. If in every half an hour time frame, the prices continue to rise, the momentum is still bullish. If you're short, you want prices to keep declining in every half an hour time frame, in which case, the momentum is bearish and you should stay short.

Keep an eye on stock price charts for commodity, or currency charts, whatever you're trading as an asset class. As long as the trend is your friend, continue to ride the trend.

But the time you see or trend coming under attack or coming under threat, or the momentum slowing down, remember, it may be time to step off the bus.

So do not try to make forward projections as easily as it is being made out to be in the social and the mainstream media. Everybody needs to do their homework and do not take movements in any security and it's underlying taken for granted.

I'm keen on hearing from you, what you think of this video, In the comments section, do let me know your feedback and what further queries you would want to raise for me to answer for you.

Do click on like on this video. Do share it with family and friends and subscribe to my YouTube channel, where I share more and more investing and trading ideas every day.

Till I see you again, this is Vijay Bhambwani signing off for now. Please do take very good care of your trades and investments.

Thank you.

Do let me know what you think of this video in the comments section below. I love to hear from you and I'll do my best to answer any queries you may have about trading.

I'll be back tomorrow in the Fast Profits Daily.

Have a profitable trading day!

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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2 Responses to "Do Trading Forecasts Work?"

Subhash Parab

Jan 7, 2020

As usual your video is very good. I have been learning through your videos as well as mail which are proved to be helpful to me. You have become one of my mentors in trading and investments.

Thank you very much for educating us in this subject.

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M P JAEEL

Jan 6, 2020

Good to hear your solid, deep, confidant and re assuring voice. Your vast experience and guidance will be invaluable to tide over uncertainties of stock market.

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