How Can You Predict The Stock Market?
Whenever you see stock market pundits and gurus on CNBC pounding the table with their next “high conviction” trade idea… well, you might get the impression that some people can actually predict the stock market!
And if you’re a newer trader who isn’t quite confident yet, I totally understand why a stock market prediction has appeal.
… but you know what?
The simple truth, is nobody knows what’s going to happen tomorrow. And naturally, the stock market is no exception.
… and you know what else?
You do NOT need to actually predict the stock market to consistently make money trading!
And sure, I know that might sound a little crazy.
But in this detailed article you’re going to learn:
(1) Truth #1: The simple mathematical facts proving why you don’t need to predict stock prices to win in the market.
(2) Truth #2: What actually matters for making money in the stock market, so you can ignore the noise and focus on moving the needle!
(3) Action Tip: A strategic framework you can use in your own trading to help you get better results (with no predictions required!)
Plus… if you really want to see these ideas in action:
Now, let’s get down to business!
And the first matter of business is setting expectations. Because with all the pomp, pageantry, and production value of the modern financial news media, it’s very easy to get swept away by a guru claiming they have a crystal ball!
But never forget truth #1…
Truth #1: Nobody Can Predict The Stock Market 100% Of The Time
It doesn’t matter whether you’re watching CNBC, looking for trade ideas on Stocktwits or just talking with friends, there’s always somebody who sounds SO certain of what’s going to happen next.
You know the sound bites:
- “XYZ is going to crush earnings this quarter.”
- “The top is in! XYZ cannot keep going up any higher.”
- “I know XYZ has bottomed, so I’m doubling down.”
Well you know what? This kind of conviction can be incredibly costly!
And if you’re willing to open your eyes, you’ll see the signs are everywhere. Just go back and read what Bill Ackman was saying when VRX was still trading in the triple digits.
In the stock market, the best opinions are often weakly held. And they’re always evolving as the facts on the ground keep changing. Don’t believe me?
There’s a reason Warren Buffett and Charlie Munger don’t make predictions.
Instead, they avoid committing their ego to ideas, so they remain open and flexible to change.
Or in Buffett’s own words:
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
So just remember: No matter how confident someone is in their stock picks or predictions, NOBODY knows what will happen tomorrow.
It almost sounds silly to say it. Because if people could predict the future do you really think they would give it away for free on live TV?
I think the REAL problem is this: investing and trading attracts very smart people… who are used to being right.
And over time, they genuinely forget the primary purpose of trading is to make money!
I know, I know. This sounds crazy. But it’s true! Talented fundamental analysts get obsessed with being right, feeling smart, and proving their enemies wrong.
… Unfortunately though, that’s NOT a good way to make money trading stocks.
I mean sure, it’s okay to hope for the best. But you should also be prepared for the worst: Have a plan for taking losses!
And the good news is… as long as you’re properly prepared… you don’t need ANY predictions to make consistent profits in the market.
So just keep reading, because I’m about to show you how that’s possible!
Truth #2: You Don’t Need To Predict The Stock Market To Make Money Trading!
If you’ve ever watched so-called experts talk about the stock market, you probably think you need a crystal ball to make money trading stocks. But reality couldn’t be further from the truth!
If I was a more cynical guy, I might even think there was a big conspiracy that encouraged individual investors to focus on predictions. Instead, I think that’s just what drives ratings! (…or clicks).
… so what should you do instead of trying to predict the stock market?
In one of my recent blog posts about how to make money trend following stocks, I wrote about a concept called the expectancy curve.
And instead of predictions, the simple math of expectancy is what real traders keep in mind when trying to profit in markets.
So in case you’re not familiar, the basic idea is:
- The % of winning trades has an impact on your profitability
- The size of your winning trades compared to the size of your losing trades has an impact on your profitability.
… And you know what?
The thing about predictions is, they only deal with the first factor above. They COMPLETELY ignore the second!
Now if you’re unfamiliar with this idea of expectancy, I strongly encourage you to learn more about it.
Because it’s the foundation to trading profits! And yet almost nobody talks about it.
Luckily, the concept is pretty easy to grasp once you’re aware of it.
And to help you understand it even better, here’s a short video I put together:
I really hope this concept of expectancy opens your eyes. Because it should make it clear that you don’t need to predict the stock market to rake in the profits.
In fact, you can be wrong more than 50% of the time, and still make money consistently!
But they never mention that part on CNBC, do they?
Instead of making plans to cope with uncertainty, on-air talking heads act as if they’re prophets.
I guess that’s what happens when nobody follows-up on your wrong market calls.
But for individual investors like you and me, it’s imperative we have a way to deal with the uncertainty.
So let me show you how I do it. I hope you’ll find it useful!
How to Get Consistent Results in Uncertain Markets Instead of Relying on Predictions:
By now, I hope you’re starting to see how predictions are not the answer to stock market success!
Instead, it’s the basic math of expectancy that will determine your success or failure over there long term.
But let’s go one step further.
Because once you learn how to consistently profit without predicting anything, you’ll find it much easier to tune out the noise and just focusing on making money.
… so what tactics can you use to profit without prediction?
Well, if you look at most successful traders and investors, you’ll see they’re always prepared for any possible outcome.
And therein lies the key!
How I Use If-Then Planning To Trade Breakouts Without Predicting:
As a trend following trader, my favourite trading strategy is to buy weekly chart breakouts.
And while I’m always optimistic, I know from experience that about 50% of my trades will fail. Ouch!
Of course, I do my best to find the most promising breakout stock trades. But sometimes I’m simply wrong.
So the key is to have a plan!
- I need to know what to do IF the trade goes in my favour
- And I need to know what to do IF the trade goes against me.
- And I need to decide all this before I push the buy button!
Well, let me give you an example to make this planning more practica for you.
So… as an example… let’s say I wanted to buy shares of FB, which are breaking out as I write this.
Here’s the weekly chart to get you oriented:
Now, I don’t know what will happen with FB tomorrow (nobody does!)… but you know what?
Well, we can be 100% sure that FB stock is going to go up, down or sideways!
And I know that might sound contrite. But bear with me.
Because with this information we just need to plan for the three simple scenarios.
And using my own breakout trading system here’s how I would handle it:
- First, if the stock goes sideways I would just sit tight.
- Next if FB goes down by too much, I will use a stop-loss order and sell my stock.
- Finally, if the trade does go in my direction, then I will hold on and trail my stop loss higher each week until it eventually reverses and I got stopped out.
Of course, the devil is always in the details.
This simple framework is much more valuable (and reliable!) than trying to predict what the stock price will do next.
I know this approach isn’t quite as glamorous as trying to make a big bold prediction.
But that’s not how real traders make money in the markets (… at least not consistently!)
Instead, it’s diligent planning and disciplined execution that can help you reap consistent profits.
So save your predictions for watching professional sports, political elections or the local weather forecast. Your brokerage account balance will thank you!
Further reading: Resources to Help You Profit Without Prediction
By now I hope you’ve realized that predicting the stock market isn’t the answer.
If you’re still a little unsure how to get expectancy working in your favour, check out this guide on How to Find Breakout socks to buy on FinViz. It’s a great free resource to help you get started!
And while you’re at it, you can also download my simple 12-page PDF that shows you the nuts and bolts of my own personal stock trading approach. Why not take a closer look?