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Predicting the next stock move is just deceiving yourself

People keep asking me questions how do I choose stocks for options trading or what is my expectation, why I chose to trade one stock over the other, what if the stock fails, and what was my rationale behind a trade.

When they ask me for a trade reason, I usually tell them that I had none. Why do I need a reason to trade a certain stock?

I keep telling them that I do not predict stocks movement. I do not care what the stock is going to do or what others think about it.

I do not care what all the stock gurus in the entire world think, predict, or recommend. I trade what I see and not what I think the stock may do.


 


 


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I once had a novice trader explaining to me his prediction of the stock’s next move. He spent hours creating his system, charting, oscillators, calculations, data recording, chart analyzing, and at the end he victoriously announced to me that he finally got it and that the stock would reverse at the overbought resistance at a certain price level.

It was a sure thing and there was no other way. His system told him, that it couldn’t go the other way around.

When the stock passed through his resistance and continued up without looking back he concluded that he needed more studying and tweaking his system, and that he wasn’t yet perfect in analyzing it.

Maybe adding a few more tools to his analysis would solve the glitch.

But all he actually achieved was his own deception.

He spent hours over the charts and analysis until he convinced himself that there was no other way around to trade the stock. He convinced himself so deeply that he couldn’t see any other alternatives. To him they were nonexistent.

He simply stopped seeing what I saw as a by-stander with a different perspective that there were no sure things in his analysis, no 100% sure resistances, overbought or oversold reversals or sure calculations with predictable outcomes. I wish there were some magical oscillators or calculations which would point to a trend reversal. But there are none. Nothing he did could ever predict what the stock or market would do next. There still was only a 50% chance that it would happen.

Later, he ended his work up disappointed and he concluded that he wasn’t yet ready to trade options because he hadn’t have the right tool to trade and he couldn’t determine which direction the stock would go.

All the time he was working on building up his own deception and disappointment.

In the past, I was doing the same thing. I too wanted to know where the stock will go and what the stock will do.

But you will never be able to find out. You do not need to know what the stock will do, but you need to know what you will do.

I keep saying it all the time. It is you who needs to know what you will do, not the stock.

And then you need to find a strategy and market (stock) which will allow you to trade around that. You need an instrument which will allow you to execute a trading plan for any outcome the stock or market prepares for you.

To me, this instrument are options. Only trading options allow me to trade what I see and change direction or adjust a trade should the outcome change. No other vehicle does the for me. If I buy and hold a stock and it starts falling in price I cannot do anything about it. I can close it for a loss but that’s it.

Over years in the market I collected enough losses already. I do not need more. Options allow me to adjust a bullish trade into bearish, roll, or do a magic which no other instrument provides.

I met novice traders who were afraid to trade and they kept asking me what would you do if you open a trade and it immediately turns against you? Don’t you want to know where the stock will go so you keep trading with the trend?

I only have two words to this:

Who cares?

It may happen that I open a trade and it goes busted right away. But who cares? I don’t!

I cannot predict where the stock will go.

I cannot predict if the trend will continue or it will reverse the next day.

And because I cannot predict it I do not waste my time doing it. I do not spend hours drawing pictures and marking up all reversals and predicting where the market will go, like this guy from Stocktwits who spent hours drawing this chart and predicting that SPY would go higher to the “rounded topping pattern” with a”exuberance” with “possible overshoots” will happen and then the market reverses and will go down to around 207 level:

 
Jake Wujastyk Prediction
 

None of it ever happened.

The stock market continued up to about 217 level, then corrected slightly to 214 level and continued higher and reached 220 level. I bet the guy continued re-drawing his chart as long as he finally got it right and his bearish prediction got correct so he could get celebrated by all his followers how great job he did. I do not know because when I told him what a futile job he was spending time on and that all he just created was a children coloring book he angrily blocked me. But considering reactions from his followers I can deduct that this was probably happening.

Here is another “great” prediction from another guy who predicted that in September the market would crash to 1860 level (SPX):

 
Stupid Prediction
 

He drew all those green arcs to show that the market worked in some magical frequency waves and based on those waves it is now predictable to see that SPX was poised to crash to 1860 level. I sometimes wonder if these people really believe to their drawings and trade it or they just troll around.

Of course, we all know that none of it ever happened.

 
I re-draw his “study” and added a few questions to it:

 
Stupid Prediction
 

He blocked me for bashing his work.

All, these guys ever achieved, was their own false conviction and deception. They just deceived themselves. And if they ever traded based on their own deception they probably ended disappointed with the outcome of their trade and trade analysis.

If you try to predict the market or stock, you are just deceiving yourself and obstructing a clear view of the future. You are just blinding yourself, paralyzing yourself from the next move. And you would end up unable to adjust a trade or get out. Instead, falsely convinced, you will be adding more to the trade, throwing good money after bad ones thinking that your analysis will be correct one day.

So how do I trade then when I do not analyze the stock, do not “study” the stock, predict it’s move, or try to spot reversals?

I trade what I see at any moment in time. One day, I open a trade based on the stock price action and then sit on it.

When the situation changes I change the trade (adjust). And I do it again based on the current price action and not any of my false prediction or expectation. And I keep doing this for the rest of the life of the trade.

I like to trade strangles. I believe they are a great strategy maximizing you profits more than any other strategy. And they also offer a great flexibility in adjusting or converting a trade. Like no other strategy. Well, except single option legs, though (it will always be the easiest to adjust a naked put for example).

It was a long way for me to end up with strangles. You may know, if you follow my blog, that I started with stocks, later added options, naked puts, then spreads, and again puts. Later, I added naked calls and landed with strangles today.

In my next post I will describe how I choose stocks to trade, build a strangle, and trade it.
 
 





2 responses to “Predicting the next stock move is just deceiving yourself”

  1. easydividend says:

    Hey :)

    This is one of the best articles I have ever read in the world wide web.

    Why I think it is one of the best? Because it is so true! Noboy can predict the market. Thats what I try to say to all my german readers. We have to trade what we see, not what we think.

    Thanks for post! You are amazin!

    best regards

    Chri

    • Martin says:

      Hi Chris,
      Thanks for your kind words. Predicting the market or stock and searching for that holy grail of knowing where the market or stock will go is a very common mistake investors and traders make. And if they trade using their predictions they end up more wrong than right and making more mistakes, becoming uncomfortable and desperate. And out of that desperation they will start making even more mistakes and ruin their account. Then they quit trading claiming that the stock market is a casino and you need to know that holy grail they failed to find while the “big boys already know it and it is a secret for the common mom and pop.” You will hear these failed investors whining about the market all around the internet, workplaces, or bars. Or because they want to know what the stock will do and fail to learn what they need to do.
      Thanks for stopping by, appreciate it.

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