The one great certainty of the stock market is change. We can always be confident that the market will look quite different at some point down the road. Dealing with that inevitable change is the essence of trading.
There are two basic approaches to dealing with change. We either try to anticipate when and what will change or we react to conditions as they change. The way in which we do either of these will be the primary determinate of our trading success.
When we first learn about the stock market, we tend to see it primarily as an exercise in predicting the future. We just have to pick the right stock or guess when the market will form a top and we will make a fortune. The business media are full of stories about how a select few saw in advance the major market ups and downs. They made a fortune with this insight and it seems logical that we should try to copy them with these sorts of predictions.
Business journalism loves the "Big Call." Stories about how this expert is expecting a major move is what attracts attention. The headlines are easy to write and the drama of predicting that gold is going to $2,000 or that the Fed is producing a market disaster akin to what happened from 2008 to 2009 is sure to attract readers and viewers.
In the years I've traded, I've come to realize that the predictions are almost never correct and even if they are correct, the timing is so poor that it is useless information. The people that claim to know the future, know much about the stock market and economics and can formulate some amazing and compelling arguments. But they still are just guessing what will happen.
Did anyone, 5 or 10 years ago, predict that the market would be doing what it's doing now? The conventional wisdom back in 2009 to 2010 was that the massive accommodation provided by the Fed would eventually produce extreme inflation, yet here we are with interest rates near multi-year lows.
To improve your trading, the best thing you can do is focus less on these sorts of predictions and "Big Calls." Instead, focus more on dealing with conditions as they actually change. The folks that did the best during the major bear markets in 2000 to 2002 and 2008 to 2009 aren't those that saw it coming, but those who reacted quickly as they developed.
Think about that. Trying to predict what was going to happen was impossible, but if kept your finger on the pulse of the market, and didn't freeze when things started to change, then you were able to avoid the majority of the pain of prior bear markets.
I'm using bear markets as an example here as how reaction beats anticipation, but there are examples in individual stocks every day. I don't know what any individual stock will do in the future, but I do know what a "good" stock pattern looks like, and I know what good price action is. If I embrace those things and then exit, when they shift I can make money.
The biggest problem most traders have with reacting vs. anticipating is that they really don't want to admit that they are incapable of predicting the future. We all want to believe we possess special insight and know what will happen.
Once we admit that we don't know the future, it becomes much easier to develop a trading methodology that is focused on reacting to changing conditions. There will always be uncertainty, but if we don't pretend that we know what will happen, then we are better prepared to deal with what actually does happen.