This is something that I learned when I first started trading. Focus on predicting DIRECTION instead of PRICE.
- You should predict whether the market will go up or down.
- Don’t predict IN ADVANCE exactly HOW FAR the market will go up or down.
Because it’s much easier to predict 1 thing than it is to predict 2 things:
- Predicting 1 thing: whether the market will go up or down over the next X period.
- Predicting 2 things: whether the market will go up or down over the next X period, and exactly how much it will go up or down
It’s hard enough to predict direction accurately. Most people can’t do that. It’s even harder to predict the exact price target. This is why I never have a pre-determined price target.
Predetermined price targets are just numbers that people pull out of thin air. Sure, some traders will draw support/resistance lines as price targets. But when these fail (which they often do), these traders will simply draw new support/resistance lines. Remember: if you draw 10 different support/resistance lines, 1 of them will always “work”. It’s like saying “if the stock market doesn’t top at $110, it’ll top at $115. If it doesn’t top at $115, it’ll top at $120. If it doesn’t top at $120, it’ll top at $125…. And so on”. Well thanks genius. That’s how numbers work.
This is also why we never create in “year end targets for the S&P 500”, one of Wall Street’s favorite games. Year end targets are meaningless.
No one has been able to consistently and accurately guess this, yet Wall Street analysts still treat it as if it was real “analysis”. (This is kind of like how many analysts will predict a company’s earnings 5 years into the future. Such predictions are no better than a coin toss.)
Why are these price predictions useless?
Because a lot can happen in the span of 1 year. It’s better to predict the next 1-2 steps instead of the next 10 steps.
The same thing applies to business as well as investing/trading. A business doesn’t say “in 10 years, we’ll be doing XYZ”. Businesses set a general long term direction (e.g. in 10 years, I want to have 50% market share), and then specific quarterly goals.
- When Google first started, it didn’t think that it would be the juggernaut it is today.
- When Facebook first started, it didn’t’ think that it would be the juggernaut it is today. The founders had various visions along the way, and they adjusted that vision as time moved on.
The same thing goes with trading and investing. Any year-end target needs to be constantly adjusted with the updated facts and data. These adjustments need to happen so often that playing this game is meaningless. It’s just not worth your time.