Why forecasts are pointless in trading and investing

in this education article, Vlad Gubernat explains why traders and investors shouldn't put too much stock in market forecasts.

Let’s start by defining what a forecast is: an estimate of a future event, specific in time and numerical value. A few examples include: EUR/USD will fall below parity by September 2015; Oil will reach $80 by year-end; Gold will be under $1000 by November 2015. These kinds of forecasts are made all the time by confident-sounding analysts, strategists, fund managers and others. Although the methods used to arrive at such precise forecasts are diverse, there’s just one idea that they convey: in order to make money, you have to check your crystal ball, see what comes next and act accordingly. In reality though, markets have always been impossible to predict. If the past appears easy, that’s just the false clarity of hindsight. But if you read market history and see what people were saying and thinking in 2014, 2009, 2008 or at any other point in the past, you understand that the future is always cloudy and the crystal ball is always cracked. The bottom line is that no one can accurately and consistently predict the market behaviour so that you could derive any value from a trading/investing standpoint.

No one knows what tomorrow will bring

Whenever you find yourself reading or watching someone who purports to know exactly where the markets are going, consider these two factors:

1. no one knows what tomorrow will bring. Whether the pronouncements are made with total confidence and backed by comprehensive analysis or not, it doesn’t change the basic fact that the future is unknown. It could be said that, at best, they are educated guesses.

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2. all forecasts get stale very fast and become subject to further revision as new data is released, conditions change, unanticipated events unfold. Yesterday’s prediction can be undone by tomorrow’s press release – SNB announcement of the end of the EUR/CHF peg on 15th January this year being the perfect example.

Forecasts shouldn’t be confused with probability based scenario building. The latter has very little to do with highlighting precise targets. Instead the focus is on assessing the odds of various sequences of events and on managing risk once the most logical course of action is chosen.

The true danger of making forecasts, or believing those generated by others, lies in the natural tendency to stick to them regardless. This is the tendency of wanting to be correct, to will the prediction to come true. That’s how you get supposed ‘experts’ who are perma-bears or gold bugs (persons always bullish on gold). But once you let go of the hope to be right in the face of mounting evidence to the contrary, you can change your positions in the markets to reflect reality instead of wishes.

The key thing to remember when it comes to trading or investing is to ignore the forecasts and instead make money.

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