On reactive trading and why I don't make market forecasts anymore

It seems to me that the popular trading blogs have one thing in common. They all make some form of forecasts about the market, or even better, calling out to a particular stock or currency pair. My guess is that there's a lot more people looking for trading ideas for quick profits than actually interested in the mundane mechanics of trading. Well, that and because of the fact that some of these blogs are written by respectable professionals that do provide good insights (my recommendations are linked to in my blogroll, near bottom of the sidebar to the right). I used to publish my predictions on the market on a frequent basis. It was my way of taking notes and keeping record for the week or month. Ever since my embarrassing, and costly, attempt to call for the bottom in October 2008, I have learned to keep my views to myself for the following reasons.

  1. I suck at forecasting, terribly.
  2. I wouldn't want anyone to trade on my guesses.
  3. There are plenty of other, much wiser, traders posting their views online.
  4. I changed my strategy by trading on reactions and not predictions.

Point #4 is what I'd like to discuss in this post. The main problem I have with making forecasts is that I get stuck to one perspective. Say if after a weekend analyzing session, I conclude that the market is up for next week. I would keep looking for opportunities to go long in the market the following week. That works well if I am right. Yet, as I always say, I am wrong just as often as anyone. So the chance of success is at best 50-50. On an equal chance that if I am wrong. I lose not once but twice. First from being in the wrong side of the price move. Second from missing that opposite and correct move. As such, I have since adapted to a reactive trading strategy rather than a predictive one. Essentially, I analyze the markets to come up with conditions for different scenarios (usually just three cases: up, down, and no idea) that will play out. For example, if GBP/JPY is above 144.50, I go long. One of the trading skills I am still struggling to execute consistently is to be deliberately one step slower than most people on entering a trade. Being reactive is simplistically being a step slower than everyone to ride an obvious setup. It goes like this ideally. When the writings are on the wall and more aggressive traders have taken their position, I wait even more. Then once those trades are still left standing (i.e. not stopped out), that's when I would strike. On the other hand, if the signs are not clear as crystal, I need to have the discipline to step to the sideline. This strategy has been very useful to me as I have recorded some good trades because of it. My ideal strategy certainly is less glamourous than a buy low, sell high motto. Yet, having been through a few too many ups and downs in my account over the years, I have learned to appreciate the art of not gunning for every penny out there but aiming to keep every penny in my pocket. Much like how you would survive in a battle, the secret is to not be the first one out the line and then only go for the easy kills. Cowardly, yes. But unlike war, being brave in trading does not earn you any medal.