Markets: Random or predictable?

When you first decide to give Forex trading a go you will no doubt come across a multitude of systems and services that promise you the world for a small one off fee. The core of what these people offer you is essentially a way to predict the markets either through the use of a certain indicator or some special trading software. Almost without exception these “systems” are a complete failure and lead to losses.

Generally, almost everybody will be sucked in by the sales pitch at least once and some people are still stuck in that loop of system jumping, waiting to find that holy grail system that does what it says on the tin. The fundamental reason why we keep falling for it over and over again is because we have this unquestioned belief that the markets can be predicted. Perhaps it’s time to ask yourself if that’s really the case. Can markets actually be accurately predicted or are they much more random than you currently believe?

The key to understanding the nature of market randomness is to understand what markets actually are. Are they some mystical force beyond human control? Are they a self-controlling entity? Of course not, the truth is that financial markets are simply a visible representation of their participants. If the majority of the participants (or at least the most significant participants) buy into the market then the market will go up as demand exceeds supply. If the majority of those same participants sell into the market then it will go down as supply exceeds demand. We also know that trading is a hugely psychological activity and our buying and selling decisions are affected hugely by our mindsets.

That being the case, the logical conclusion is that to truly predict the markets 100% we would need to factor in not just the strategies and economic factors that are forming peoples decisions but also the psychological principles that are underpinning them. It doesn’t take a rocket scientist to realise that type of prediction is impossible.

So you might think that if we can’t predict the market, how do we ever make money? To answer this you need to understand what a market prediction really is. Nobody in the world can tell you with any certainty that the market is going to move up or down at any specific time no matter how skilled or experienced they are. All a good trader can do (and indeed all they ever need to do) is find a way to pick entries into the market where the odds are stacked in their favour. This is achieved through a mixture of analysis, sound money management, patience and most of all discipline.

Anytime you feel tempted to buy a trading system or package that promises to tell you when and where the markets are going to move or guarantees to make you money without hard work on your part, please try to remember this lesson. If professional traders don’t need to predict the market then why do you?

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