Avoid making predictions. The market can go up or down at any time \u2014 it is only the probability (of each move) that varies<\/strong>. Confirmation bias is a forecaster’s biggest enemy. If you make predictions, you are likely to emotionally commit to a position and discount evidence to the contrary. To counteract this, I try to present both bull and bear scenarios wherever practical.<\/p>\n Investment is not an exact science. We never know the outcome of a particular pattern or series of events in the market with 100 per cent certainty. The best that we can hope for is a probability of around 80 per cent. That means something unexpected will occur at least one in five times.<\/p>\n My approach is to assign probabilities to each possible outcome<\/strong>. Actual percentages would imply a degree of precision which, most of the time, is unachievable. Terms used are more general: “this is a strong signal”; “this is likely”; “expect this to follow”; “this is less likely to occur”; “this is unlikely”; and so on. Bear in mind that there are times, especially when the market is in equilibrium, when we may face several scenarios with fairly even probabilities.<\/p>\n Technical analysts often repeat the mantra: “the charts discount everything \u2014 all information available to the market is reflected in the current price”. The market takes time to react to and digest new data<\/strong>. We are not dealing with a vast super-computer that can detect and analyze the implications of every change in market conditions. The market is driven by mass psychology and pulses with the ebb and flow of human emotions. Emotions may respond rapidly to extreme events \u2014 and are more likely to overreact than in times of gradual change. Individuals are also seldom comfortable acting alone and are dominated by a vast herd instinct.<\/p>\n Broad market conditions, especially the supply and demand for money, drive market prices. If there is no money to buy stocks, prices will fall. Likewise, if the market is awash with money, prices are likely to rise.<\/p>\n Technical analysis acts as a useful confirmation of fundamental views or actions (not the other way round). Never place all your faith in a single indicator. They are imperfect summaries of price and volume action. Nothing more.<\/p>\n Analysis should also be separated into three time-frames: short, intermediate and long-term. While one time frame may be clear, another could be uncertain. Obviously, we have the greatest chance of success when all three time-frames are clear.<\/p>\nMarkets Are Not Perfect<\/h2>\n
Bull & Bear Markets<\/h2>\n
Technical Analysis<\/h2>\n
Time Frames<\/h3>\n
A Simple Formula<\/h2>\n