Anticipate Trends to Find Profits

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Anticipate Trends to Find Profits

Technical analysis is a significant tool for traders because it helps them to predict specific market action before it happens. These forecasts are based on historical chart patterns, the likelihood of certain trade setups, and the trader’s prior expertise. Anticipation, over time, may minimize the necessity for over-analyzing market direction and establishing obvious, objective areas of relevance. It’s not as difficult as it sounds. Continue reading to learn how to predict the direction of a market trend and benefit from it.

Anticipation vs. Prediction

Technical analysis is sometimes referred to as “black magic” used to timing the market. However, many people outside of the financial realm are unaware that traders do not attempt to forecast the future. Instead, they devise solutions that have a high likelihood of success—situations in which a trend or market movement may be predicted.

Let’s face it: if traders could consistently identify tops and bottoms, they’d be out in a Ferrari F430 convertible, enjoying a lovely length of highway, rather than crouched over their computer screen. Many of you have undoubtedly tried selecting tops and bottoms before and are sick with the game. Perhaps you’re already following in the footsteps of many expert traders, who seek out scenarios in which they can predict a move and then profit from it when the setups materialize.

The Power of Anticipation

You most certainly have your own tactics for entering and departing the market while considering whether or not to place a deal. (If you don’t, make a decision before hitting the buy/sell button.) Technical traders use instruments such as the moving average convergence divergence (MACD), the relative strength index (RSI), stochastic, or the commodities channel index (CCI), as well as identifiable chart patterns that have previously happened with a certain measurable outcome.

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Experienced traders will most likely have a solid sense of how a deal will turn out as it unfolds. If the trade is going against them as soon as they join it and it doesn’t turn around within the following few bars, it’s likely that their analysis was incorrect. However, if the trade goes in their favor within the next few bars, they might consider raising the stops to lock in profits while the position plays out. (“Bars” is used as a general word here since some of you may trade using candlesticks or line charts.)

The chart below depicts a transaction on the British pound/US dollar (GBP/USD) currency pair. It determines when to be long and when to be short using an exponential moving average (EMA) crossover. The blue line represents a 10-period EMA, while the red line represents a 20-period EMA. When the blue line crosses the red line, you are long, and vice versa if you are short. This is a fantastic setup to take in a trending market because it enables you to participate in the massive move that often follows this signal. The first arrow is a false indication, whereas the second represents a very lucrative indicator.

Image by Sabrina Jiang © Investopedia2021

This is when the ability to anticipate comes into play. The active trader frequently watches open positions as they unfold to see whether any modifications are required. Within three bars of going long at the first arrow, you would be down more than 100 pips. By setting your stop at the longer-term trend moving average, you will most likely want to exit the trade as soon as a possible reversal is detected.

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On the second arrow, once you were long, this trade would go in your favor in a matter of days. By following your stop up to your unique trading style, trade management comes into play. In this situation, you might have stopped at a close under the blue line or waited for a close under the red line (longer-term moving average).By being active in position management—following the market with your stops and accepting them when they are hit—you are considerably more likely to have higher long-term returns than if you withdrew the stop just before the market burst through it.

The diagram above depicts the distinction between anticipation and prediction. Based on the outcomes of prior transactions, we anticipate that this trade will have a similar outcome. After all, this pattern was almost similar to the one that worked before, and everything else being equal, it should have a reasonable probability of working in our favor.

So, did we forecast what would happen in this situation? Certainly not. We wouldn’t have placed our stop-loss in place at the same moment the transaction was sent if we had. Unlike anticipation, which utilizes previous outcomes to anticipate future ones, good prediction often entails a blend of chance and guesswork, making the results less, well, predictable.

Limited Emotion

We guarantee that emotions do not get the best of us and create a diversion from the original strategy by monitoring the trade(s) in real-time and adjusting appropriately. We utilize this to look back on when the trade is active since it began before the position was acquired (and so had no conflict of interest).

We can do all we can to keep to our strategy amid the heat of battle since we already have one that includes no emotion. Make an effort to reduce, but not fully eliminate, emotion. After all, you’re just human, and trading like a robot is practically difficult for most traders, regardless of their success. We know what the market will look like if both of our predictions come true.

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As a result, using the chart above, you can see where the signals clearly worked and where they did not work as they occurred based on the price movement of each bar and its relationship to the moving averages. The goal is to take control of your transactions and consistently act in accordance with your trading strategy.

The Bottom Line

Trading survival requires objectivity. Technical analysis gives various perspectives on forecasting in a clear and succinct way, however, as with everything else in life, it does not guarantee success. However, by keeping to a trading strategy day in and day out, we can reduce our emotions and dramatically boost the likelihood of executing a profitable deal. With time and practice, you may learn to predict the direction of your trades and increase your chances of making a profit.

Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Investing entails risk, including the possibility of losing money.

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