March 08, 2007 at 10:30 am | | Comments 5

The Difference Between Predicting & Anticipating

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As thrilling as it may be to predict a market move correctly, actually pulling it off is more about luck than anything. I always try to avoid making predictions in the market, because they skew my vision with a bias – which means they serve no purpose in my trading.

Predictions are often grand proclamations of what is going to happen, and they usually include details about even how events will unfold. With anything possible in the stock market at all times, it’s an appealing place for predictors to surface because they may just be right and be able to garner the glory that might come with it. Predictions tend to be stubborn, brash and unyielding, leaving no margin for error or revisions.

Anticipations might be described more as hunches, or gut feelings of what may happen. They usually involve a fair assessment of current conditions, and are based on how the current conditions are most likely to continue to develop. Anticipations help to serve more of an if/then type of role, and they allow for adjustments in a trading plan.

I don’t like to “hunt” for particular types of plays when I flip through my watch lists. Instead, I generally prefer to let the charts dictate my moves. If there are lots of bullish setups, I’ll end up net long. If there are lots of bearish setups, I’ll end up net short. On occasion though, when something drastic takes place in the market, I will let my trading experience guide me a little more and let that gut feel play a larger role in what my trading plans will involve.

This is of particular relevance right now, as I am not predicting another leg down but I am anticipating one. My anticipation right now is that the market bounce could last for a few days before another leg down begins, but I do anticipate seeing more downside based on the severity of the drop we saw last week. When the character changes so abruptly and so decisively, it usually isn’t an anomoly. Another wave of selling is likely, and there are numerous reasons (broken support levels, high volume declines vs. low-volume bounces, trapped bulls wanting out, etc.). Because of this, I’m anticipating some short setups to emerge for swing trading, so I am “hunting” for them more than I typically would.

The good news that comes with anticipating another move down is that the setups will have to prove themselves to warrant an entry. Rising trend lines and support levels will be required to break in order to trigger a trade entry for me. So at this point, anticipating another move down doesn’t back me into a corner. It allows room for an alternate trading plan, whereas predicting another leg lower skews my view and offers no flexibility.

Jeff White
President, The Stock Bandit, Inc.

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]