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 or commodity of our choice as soon as the bottom price has been reached on the forecast date and then close the trade at the exact top and short the market until it falls to the next calculated bottom price.
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.
There have been many people who have claimed that they were 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 W. D. Gann and usually involving some unique form of cyclic analysis.
An often-quoted Wall Street expression is that "top and bottom pickers go broke". In some cases this is correct! Only liars consistently buy the exact price of a market bottom and sell the exact price of the high. Only fools attempt it.
The 'Trading' / 'Forecasting' Cap
At the last W. D. Gann Experience, Lambert-Gann Educators, Inc. presented each delegate with a cap. On one side it had the word 'Trading' in large letters, and on the other the word 'Forecasting'.
The purpose of giving participants such a cap was to remind them, in a very tangible manner, that the skills of a trader, and that of a forecaster, are two vastly different sets of skills that should be utilized in markets at different times.
The forecaster predicts what a market should do. Once traders have used proven forecasting techniques to compile a forecast, the forecast dates and/or prices are noted on the traders' chart and in their trading diary. The forecast is but one component of their written trading plan. With the forecast duly noted, their role as a forecaster has ended.
The trader uses all of his or her trading skills to trade (or not trade) what the market does, not what the forecast said it should do. As soon as people consider risking money in the market, to trade a forecast or a proven market set-up, they are now wearing their 'Trading' cap. From this point onward it is their skills as a trader that are utilized.
The Advantages of Forecasting
The reason many people spend time learning how to forecast is that a well-prepared forecast, traded correctly, can enhance trading profits dramatically. In addition, a forecast helps give traders confidence in staying with a longer-term trade.
Professional traders use forecasting to allow them to enter a market closer to a confirmed bottom or top. They also lock in more profits by using tighter stops as a forecasted turning point approaches. If the market does not change direction as forecasted, it is of no concern to them as they are in the market and the market is moving in the direction of their trade. They keep using their trading skills to stay in the trade according to their written trading plan.
Professional traders also use forecasts to prepare for a possible trading campaign - that is to trade a possible large market move once a major market top or bottom has been confirmed. Both Gann and Livermore regularly reminded traders that the big money was made trading the big moves and forecasting skills can make a significant difference in trading such moves.
The Pitfalls of Forecasting
Some traders fall in love with their forecasts. They enter a trade, but fail to replace their 'Forecasting' cap with their 'Trading' cap. They are then fully exposed to some of the pitfalls of forecasting.
Forecasting has the potential to reduce a trader's profitability for some inadequately prepared people. This is usually due to one or more of the following reasons:
- They were not a consistently profitable trader before starting to apply forecasts to their trading. As a consequence, they attempt to trade a forecast and not the market reality.
- 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 to the forecast when it is clear that the forecast did not work. For example, if a forecast suggests that a major top should occur in late October in a given year and the market is still rising strongly in November, 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 the forecast fails.
The biggest enemy of traders who forecast is their ego. Successful forecasts work wonders in feeding one's ego, but it is trading skills that translate a successful forecast into trading profits.
Conversely, a failed forecast is just that. It is not a negative reflection on the worth or skills of the forecaster. No forecaster is 100 per cent correct.
A forecast that does not result in a market reversal, does not necessarily mean a trading loss. In fact, if a trader is wearing his or her 'Trading' cap, it is more than likely to end up being a very profitable trade as the market continues in the direction of the trade.
By all means become a good forecaster. Just ensure that you always remember that it is your skills as a trader that will make you the enhanced trading profits. A good forecaster who cannot trade, however, is likely to end up on an ego trip to the poor house. That is why, during The W. D. Gann Experience, we teach you how to forecast - but we always place greater emphasis on teaching you the skills required to trade.
[ For more information on how to prepare your all-important trading plan, please see 'Development of a Market Master - Part IV', under 'Articles' at www.lambertganneducators.com ]
