“Prediction is very difficult, especially if it’s about the future”

Harry is off exploring the wonders of Estonia and let’s wish him well, although I have to admit I am also a little envious.

Estonia is a hardy little country that made big sacrifices during the financial crisis, tightened its belt and came out the other end with surging growth because it did what was required to reinvigorate competitiveness. It might not have felt like it at the time but Estonia was setting itself up for a growth spurt not many people were predicting during the biggest financial crisis in a century.

That sets me to thinking about predicting markets. There is comfort in moving with the crowd and human beings are social animals. We are hardwired to band together and feel safe when we are surrounded by likeminded people. The longer that strategy works, the more people are encouraged to participate. That means the crowd gets bigger and the feeling of security we feel from having our perspective confirmed is even further amplified.

However, the more powerful the crowd, the more likely it is that it has already priced in the best of the opportunities on hand. A long-running trend is in many respects a ledger for what people have already done with their money. If that is the case, then we have to think of a well-developed trend as the “received knowledge”. The problem for stockmarket investors is that the received knowledge is very often wrong.

It is said that a bull market climbs a wall of worry

In other words, as long as there is still something to worry about there are attributes of the investment that still need to be priced in. When there is nothing left to be worried about, and that’s usually when everyone is very enthusiastic, then things can’t get any better. Quite simply if they can’t possibly get any better, then there is no room for prices to go up any further unless we move into the realm of the ridiculous. That’s the territory of bubbles and manias.

In order to triumph over the market, we need to think a little differently. There is just too much risk in thinking like everyone else. That’s why I love the technology sector. It’s all about people thinking differently and the challenge is to identify the stories that are really going to capture the imagination and changes our lives forever.

I feel privileged to be writing a technology letter because we are living in an age of technological innovation like nothing any of us have lived through before so there is always something to write about. Every month I look forward to writing Frontier Tech Investor because there is just so much to talk about and so much on the horizon that is going to change the way we live our lives; figuratively, literally and financially.

The way I predict markets with technology is I think about how an innovation can change the productivity of an individual, sector or economy. If I can answer that question, then I know what I’m going to write about.

However, what I want to talk to you today about is something slightly different because it’s the kind of strategy I’ve been using in my personal trading for years. Basically I follow two basis strategies that pivot on the desire to always do something that the market does not expect. The first is I trade what I call “explosions waiting to happen”. The simple fact is that when markets range, they inevitably break out and trend. I scour the markets for these kinds of patterns, then identify the catalysts that could transform a range into a trend. That’s just about all I talk about in Trigger Point Trader.

What I’m most excited about right now though is the release of Reflex Trader because it relies on publicly known facts that investors don’t normally associate with the markets. It’s just the kind of trade I love because it moves markets, but in a discrete way that is both predictable and in many respects under the radar. The windows of opportunity it throws up highlights an important point about forecasting.

It’s a lot easier to predict direction than an absolute level

Whenever I’m interviewed in the financial media the question they always ask is, “What’s your target?” However, that is a silly question. No one knows what the future holds, and there is no point telling the market what to do. It just doesn’t listen. It is literally impossible to predict with any hope of accuracy at what level any market is going to be at any point in the future, so why try?

The situation reminds me of Edgar R Fiedler’s quip, “If you have to forecast, forecast often.” That simply means quote your forecast often and tailor it to the circumstances so no one remembers what it was originally. I see a lot of evidence of that in the financial media, and what it means is the views you hear in the financial channels usually tell you more about what people have already done with their money than what they are going to do.

That’s why I spend my time trying to find circumstances that are in my favour rather than saying how much I want to make from a trade or thinking about what other people are saying. It is much better to approach markets with a sceptical attitude. I always think more about how much I am prepared to lose if I am wrong than how much I want to make before I enter the trade. That limits risk while leaving open maximum potential for profit.

It’s that constant desire to find an edge that led me to think about all the things in my life that are certain. The sun rises, my childrens’ love, the turn of the seasons, the lap of the waves, the hum of bees, hurricane season, weekends off, holiday parties, summer holidays. But how much of that is quantifiable? That’s a big question but I found a data series that has unique characteristics. It is lengthy, repeatable, has a cyclical rhythm that happens twice a month and more than anything else it’s tradable. I don’t believe there is anyone else in the world who is making this kind of strategy available to the public.

That does not tell me how much the market is going to move. Nothing will. What it does is deliver a set of circumstances that has the potential to skew the odds enough in our favour to help generate profits. Realistically, what else can we ask for? There are no guarantees; if there were, there would be no room for profit. All we can ask for is that we have a reliable, repeatable and discrete edge. That’s what I am delivering with Reflex Trader.

If you’d like to learn more about it, click here.

All the best,

Eoin Treacy

PS The opening quote of this piece comes from Niels Bohr, Nobel laureate in Physics. Well done if you recognised it.

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Category: Technology

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