The relationship between forecasting the trend and generating profits
Is it possible that the market is rising and investors are losing?
Many empirical studies have shown that most traders in the financial markets lost even when the market moved over time in a clear trend. To a large extent, this is also true for investors who tend to hurt their profits, by taking too frequent actions, joining the trend in its later stages, and staying in the market when the trend has already changed.
[The difference between investors and traders is the time periods in which each transaction lasts – traders operate in short time periods (minutes to a few days), while investors hold their positions for longer time periods.]
If so, correct identification of the trend does not guarantee gains in the financial markets, although it may certainly help.
Is it even possible to predict the direction of the market?
In the face of countless analysts, forecasters, and various experts flooding us with forecasts about each of the financial markets, this question seems a bit strange, but it is not.
When the market is in a clear and ongoing trend it is quite simple to spot this. In each technical analysis course, a number of techniques are identified for identifying the trend. Each basic course also teaches a number of strategies that allow you to join the trend and enjoy it.
Beyond the difficulty of translating the theory into the real market, the real challenge is scheduling the reversal of the trend, and in both of these challenges, most investors and traders fail. Identifying the point at which a trend ends and it is desirable to realize profits, and identifying the point at which a new trend begins and it is worthwhile to enter the market at a particularly attractive price are challenges that even professionals have difficulty with.
It is important to understand and take into account in the decision-making processes that these two points are not the same, because between the end date of the trend and the start date of a new trend the market may shuffle, even for a long time.
So what should you do?
First, investors and traders in the financial markets have to come to terms with their low ability to be precise in timing the start and end of trends, and with the tendency to “spoil” even when the trend is clear and properly identified.
Once these limitations have been internalized, the investor or trader must adopt action strategies that take them into account and reduce their negative impact.
In addition, we must always remember that capital market activity is a statistical matter, meaning that there is a probability of success and failure of any transaction, and even when everything seems perfectly clear there is a chance that the market will go against us.
Adherence to the three ideas mentioned above, and especially the third, will allow the investor and trader to enjoy profits in their activities in the financial markets and avoid economic disasters when it turns out (as will probably happen many times!) That the market is moving in the opposite direction.
And one more little thing
Of course, there are also strategies for identifying trend reversals, but their reliability is relatively low and they have difficulty indicating whether the onset of a particular move is only a temporary correction to the dominant trend, whether it brings with it a new long-term trend or a short-term move.