Predicting market moves is a lot like predicting hurricanes. This past weekend as I was listening to the hurricane expert on the weather channel, he said, “Our job is predicting changes in movement”, which is really almost the same as what a trader. The difference is they are predicting changes in hurricane movement and a trader predicts changes in price movement.
Just like technical analysis tools to predict market moves, the hurricane experts use mathematical tools to project where hurricanes will go. They look for trends in the models and confirmations using different analysis techniques just like traders do.
The current hurricane, Dorian, has been quite the challenge because it’s quite volatile. They expect the hurricane to stay off the coast approximately 20 miles. However, their margin error is approximately 56 miles, which could be devastating for coastal residents if the hurricane goes within the margin error.
Another way of looking at margin error for me, is risk. When I enter a trade, I know that the trade may go against me by “X” amount of ticks before it resumes the path that my technical analysis has indicated.
Predicting Market Moves on Nasdaq
For example, on the Nasdaq futures this morning, the ADX formed a magenta peak indicating price would go up to the red ATR (plus sign). When it retraced back to the ATR, a bearish bar formed. This indicated a downward path. The risk (up to the red dot) was 64 ticks and the reward was a potential of 127 ticks (94 ticks if it simply tested the prior low before the peak formed).
The ADX magenta peak, which is predictive of retracements, flashed the warning sign that price was about to pullback and that I needed to start paying attention to the market for an upcoming entry. Once price went to where I believed it would go, then price indicated that it would resume its path. However, not all entries are perfect and price can fluctuate. That’s why traders should allow room for error and set their stops outside of the margin error.
As you can see, predicting market moves is a lot like predicting these hurricanes. And, even with the best tools, sometimes you will be wrong. That’s why it is important to know where your margin error is and, if price goes beyond that error, you accept the loss and move on to the next trade.