Never Predict Market
Do Not Predict the Market, Trade on What Is
Do not get into the habit of thinking that you are predicting the market. Thinking that you are predicting what the market or a security will do can easily become a habit of mind. The problem is that it seduces a person into a habit of arrogance. At best, you can make estimates about the alignments of supply and demand. When a stock breaks through significant resistance, then you may deduce that buying pressure (demand) was significantly greater than selling pressure (supply) at the level of resistance. Since the resistance represents a concentration of sellers, once the stock is above that concentration, selling pressure is likely to abate and the demand for the stock is likely to push the price higher. These are probabilities based on the reality that the stock just broke through resistance. The fact that the stock just broke through resistance is “what is.”
Learn to think of yourself as trading on the basis of what is rather than on the basis of what you think ought to be. Simply observe what is happening and position yourself accordingly. A chart is a picture of what is. It is both static and dynamic. The static part of a chart shows what has happened in the past. From that past, you can see how the supply and demand forces are aligned. For example, if the stock has reached $45 on 5 separate occasions, and on each occasion the stock fell from that level, you may draw a conclusion. Since a stock’s price falls when there are more sellers than buyers, it is obvious that there are sellers at $45. Other people have probably drawn the same conclusion. Therefore, you and others will view $45 as a region of supply (resistance). If you have the stock, you will want to be out early when the stock approaches that level. Others will be thinking the same thing and the reversal of the stock as it approaches $45 becomes a verification of the fact that there is resistance at that level..
The dynamic part of a chart relates to the various ways in which momentum can be observed. If you can see momentum in a chart, there is some probability that it will continue. For example, assume that the chart of a stock reveals that the stock has been climbing steadily along a straight line that is inclined at a 45-degree angle and without any noticeable positive or negative spikes in price. You may reasonably conclude that the stock is under persistent accumulation (buying pressure). It is true that the buying does not have to continue. However, when the buying pressure begins to ebb, the stock’s pattern will show that the stock is breaking the rising trend by moving sideways longer than it should if it is to maintain the 45-degree angle of ascent. Instead of continuing up it will begin to arc or go flat. As long as the stock is maintaining that 45-degree angle of ascent, it is fair to conclude that at the moment there is momentum. The momentum can mitigate at any time. Until it shows signs of diminishing, the momentum is still there.
Momentum, by definition, implies continuance. The momentum you see is therefore included in what is. The shorter your time-frame, the greater the probability that the momentum will persist during that time. It is more likely to continue persisting for a day than for a week, and more likely to persist for a week than for a month, and so on.
Our stockdisciplines.com traders keep their focus on what is. Why? When you trade on the basis of what is, you are keenly aware that what is, is continually changing. When you think you are predicting the market, you are far less flexible when change occurs. Thinking in terms of what is, you are much more likely to be aware of your vulnerability, and you are much more likely to devise a plan to mitigate that vulnerability. You are more likely to ask yourself, “what if….”