What’s the difference between Anticipation and Prediction?

There are lots of signal services, newsletters, and trading rooms offering predictions for the coming days, weeks and months ahead on what the market is going to do. It's a very tempting proposition to give subscribers a peace of mind on what the market is about to happen. Some believe it is possible to see what the market will do and subscribers do follow these services. Unfortunately, predictions don't exist even if these advisors are seers. No one can make the correct predictions even 50% of the time consistently, market is either goes up or goes down.

When traders anticipate what the market will do, is it the same as prediction? Prediction is declaring something will happen exactly in the future with only one outcome while anticipation is to give thought in advance to all possible outcomes. Anticipation requires dealing with problems before they arrive; prediction is expecting something to happen without dealing with. Prediction tends to take a bias or position while anticipate requires careful thought of what might happen: good or bad.

An example of the anticipation is when the trader is watching the prices rising and approaching an old resistance level. He anticipates that the prices may either continue or reverse. He has to make preparations to deal with both scenarios. One is to prepare for the breakout and continue to the upside, he has to determine at which price he will go long and where the stop loss will be place. If the prices reverse, he has to determine where the short entry will be as well as the stop loss. These scenarios prepare him for the next price movements, anticipating what other traders will do when the prices get to the resistance level. If he predicts what prices will do, say, has been going up and continue to go up. He has no plans for the possible reversal. He is focused only on the uptrend move and no on the possible reversal or the consolidation. These scenarios must be constantly considered and planned as the markets continually evolve. This mentality makes a tremendous difference between a successful trader and a losing trader.

Predicting is a loser's game, feeding the need to be right instead of the need to make money. The ego many times is the culprit to show off to other traders how good he is at predicting the market direction. In trading, ego and profitability cannot co-exist. If it's not ego, most traders will look for one direction and then use evidence to support that bias ignoring the evidence that may support the opposite direction. This bias is predicting the future. It tends to carry the mindset until after the trade is made. It may be a profitable trade, but eventually the trader is so convinced of this bias that when trade fails, he'll have no alternative in preparing for the loss.

One of the desired traits of a successful trader is his ability to prepare of all possible outcomes, imagining the scenarios the market may do, up or down, before the trade is made. He knows he cannot predict but he can calculate the probabilities of the market going one way or another. In anticipating the outcome, he has a plan for one outcome or another. What happens if the market goes against his position, where will he exit? What happens if the market goes in favor of his position, where should he exit to take profit?

Anticipating is preparation for both outcomes, good or bad. Calculating how much to lose just as important as how much to expect to win. This means the trader will identify in the chart where he'll see the entry point and two exit points (stop loss and profit target). By having this method, he can identify his risk-to-reward ratio as well as the probability of the success of the trade.

So how do we overcome this dilemma? Probabilities can be made found through rigorous testing historical data based on strategies that the trader plans to trade with them. Finding statistics to back his notion that the strategy works will give him confidence in approaching the market and give the mindset to anticipate and not predict the outcomes. One way is the see the market as it is showing us either by the price action or by indicator.

Recognize that prices or indicator can change direction at anytime. By using statistics to make an educated guess, the trader can find which direction the market will likely go. But probability cannot guarantee the desired outcome. This means a backup plan must be in place, i.e. a stop loss, in case that desired outcome doesn't happen. This is the reason why successful traders have stop loss in place. A stop loss is a deciding factor that determines if the outcome has worked or not. The trader must accept that the market will always be right and trying to be right will prevent the trader from being one with the market and go with the flow.