Neil A Costa
If there ever were a holy grail of trading and investing, it would have to be the ability to calculate the date and price of every intermediate or cyclic market top and bottom. Our trading would then be simple and easy – we would buy the stock/futures contract/option/warrant of our choice as soon as the bottom price has been reached on the forecast date, and then close the trade and short that market until it falls to the next calculated bottom price. Of course, this system would soon become self-defeating because, as the word spread, more and more people would be trying to take the exact same trades.
In reality, there have been many who have claimed to be able to forecast tops and bottoms in this manner with great accuracy. Such people usually claim to have made an amazing discovery, often based on the works of R. N. Elliott, W. D. Gann and/or involving some form of cyclic analysis. Some claim that the real secrets lie in the application of astrology.
It is fair to say that every trader would love to know the ideal time to enter and exit every trade in advance. That would be the key to an almost instant fortune.
In reality, it is my belief that markets can be forecast, but not with the degree of certainty that many would suggest. There is ample evidence that the principles of Gann theory, Elliott Wave theory and cycle analysis can forecast dates and prices of market turning points in the future. Many such forecasts have been published well in advance for all to see.
The real issue is the consistency of the forecasting technique. If forecasts are wrong too often, or the market turning points forecast are too small to trade profitably, traders will lose more on the failed forecasts than they will make on the successful forecasts. It is for this reason that I firmly believe that one should strive to become a consistently profitable trader before turning one’s attention to forecasting. Remember, forecasters tend to remind us of their successful forecasts. Few publish all of their forecasts.
There is an often-quoted Wall Street expression that “top and bottom pickers go broke”. In many cases, this is correct! Professionals use forecasting to allow them to enter a market closer to a confirmed bottom or top and to allow them to lock in more profits by using tighter stops as a forecast turning point approaches.
Only liars consistently buy the exact price of a market bottom and sell the exact price of the high. Only fools attempt it. Professional traders wait for the market to confirm their forecast before acting.
- They were not a consistently profitable trader before becoming involved with forecasting. As a consequence, they trade the forecast and not the market reality.
- They assume that forecasting gurus must be correct. They suddenly find themselves in a strongly trending market – trading in the wrong direction and losing money at an alarming rate.
- Even when the forecast appears to be working, they take the confirmed trade according to their rules, however they then assume that the market must keep trending in its new direction. If it does not, a profitable trade soon becomes a losing trade.
- Once they have a forecast in their minds, they find it difficult to ignore the forecast and to trade the market in the opposite direction when it is clear that the forecast did not work. For example, if a forecast suggests that a major top will occur in January in a given year, and the market is still rising strongly in February, a professional trader would know that there is only one direction in which to trade, and that is with the trend – upwards. Many traders will suffer a huge opportunity cost when they allow a forecast to scare them into inaction when a forecast fails.
Forecasting financial markets is a fascinating activity. It can also be very profitable. Nevertheless, a trader’s highest priority is to make consistent profits.
Remember, a consistently profitable trader can improve his or her profitability by learning how to apply proven forecasting principles. A good forecaster who cannot trade, however, is likely to end up on an ego trip to the poor house!