By Chris Ebert
It’s difficult to predict the future; some might say it’s impossible. The stock market, as with any process that involves predicting the future, is, as one might expect, very unpredictable. But unlike natural processes that are difficult to predict, for example predicting where and when a storm might strike, the stock market’s unpredictability is intentional.
Whereas a storm may be unpredictable, the inability to forecast its path with 100% accuracy is a result only of a lack of data; the more data – the more accurate the prediction. That’s because, presumably, nobody is steering the storm. If some force outside nature, perhaps some form of consciousness, were to steer a storm, it would not matter how much environmental data was collected, it would not be possible to predict its path without also being tuned to the consciousness controlling its path.
Accordingly, it is not possible to predict stock prices with 100% accuracy without understanding the consciousness controlling those prices. Moreover, it is downright impossible to collect enough data to understand the collective consciousness.
Predicting the Future
There will always be unknown variables that push folks to take trades. Your reasons for taking a trade may be quite different than mine, even if we both happen to buy the same stock at the same moment in time. Furthermore, it is possible for you to earn a profit while I take a loss, on the same stock, purchased at the same moment in time. The end result of each trade depends on how long of a time frame each of our trades encompasses.
One of us may intend to hold the stock for several years and the other for just a few hours. Without knowing each other’s intentions, it is impossible to predict the other’s reactions to movements in the stock price. One might be inclined to exit the stock after just a few ticks in the price; the other may have no intention of selling, ever, no matter what the price, unless the funds are needed for another purpose, e.g. retirement.
No matter what our intentions, the ultimate goal of every participant in the stock market is exactly the same – to benefit from probability. A long-term investor who holds stocks for several years or decades is dependent upon the probability that such action will be profitable in the future, simply because it was profitable in the past. Past performance predicts the probability of future results.
If holding stocks for 20 years has always returned a profit in the past, the probability is high that buying stocks now and holding them for 20 years will also be a profitable endeavor. If entering a Position Trade on a breakout above a Darvas Box has had a high probability of profitability in the past, chances are good it will have good results in the future.
The same can be said for buying the dip in an uptrend, selling the rip in a downtrend; buying the 30 RSI, selling the 70 RSI; buying a break above the 50 SMA, selling a break below the 200 SMA; buying support, selling resistance, buying the 61.8% FIB, selling the 161.8% FIB. Whatever the method, the only reason a trader uses it is because it has worked in the past. Even seemingly unusual methods, if they have an historical track record of success, are bound to influence traders. Traders who base their decisions in astrology, for example, are no different than those who trade using traditional technical analysis or long-haul investors who use no analysis whatsoever. Each is using past performance to predict future results.
Stock Market Unpredictability
There is no single right method for trading in the stock market. That’s because there are countless millions of methods that work well. All those successful trading methods have one thing in common; none of them can predict the future with 100% accuracy, and each of them makes allowances for errors.
There are countless methods for being successful in the stock market, but only one way to fail. A trader who attempts to predict the future, without making allowances for errors in the prediction, is doomed to fail eventually. A trader who depends on past performance being a guarantee of future results may survive for a time – with some uncommonly good luck, perhaps a very long time – but eventually the luck will run out.
On the other hand, a trader who makes allowances for errors can generally expect to do no worse than to break even over the long term. It is certainly possible for a trader to experience an awful string of bad luck, in which every trade results in a small loss. Repeated hundreds or thousands of times, death by a thousand paper cuts is not entirely impossible, but it’s an exception. Even with a thousand paper cuts, it often only takes a few really good trades to heal all the wounds.
Survival in the stock market depends on nothing more than taking the best shot at predicting the future, and then ensuring the damage on any one trade is small enough, if the prediction proves to be incorrect, that there will be enough funds available for many more trades to come.
Unpredictability is an Agenda
The future of the stock market is not predictable with 100% accuracy. That’s because the collective consciousness that drives the stock market is one that is dependent on unpredictability. No matter what method one uses to make predictions and enter trades, someone else’s profit depends on the failure of that method. Essentially, the stock market behaves like a storm, with one monstrous exception – the stock market‘s agenda is to cause the most damage by being the most unpredictable to the largest amount of participants.
Presumably, a storm such as a typhoon or a tornado does not have a mind of its own. It moves in a way that follows the laws of nature. That a storm causes damage, no matter how seemingly targeted such damage may appear, does not prove that the damage was intentional. Damage in the stock market is a different story; it is definitely intentional. Everyone who participates in the stock market depends on damaging other participants as much as humanly possible, whether by taking profits away from others or by causing outright losses for other traders.
The stock market thrives on unpredictability. So, it is important to note instances of unpredictability, particularly unusual instances. Each instance of unpredictability yields a clue as to who is causing the stock market to veer off its path. Who is currently benefiting the most from the current path?
The following analysis uses options traded on the S&P 500 stock index. It is presented here weekly as a means of identifying who is currently being fooled the most by the stock market. Someone is always being fooled; there is always someone whose prediction isn’t working. Option traders are in a unique position to identify the bigger fool. By identifying the bigger fool, traders may avoid becoming the fool themselves, or at the very least make preparations in case it becomes unavoidable.