Why Stock-Market Predictions Are Dangerous
Updated: Nov 3
Why Stock-Market Predictions Are Dangerous highlights how preparation, discipline and decision-making affect trading outcomes. Psychology matters most when it supports a tested method, predefined risk and consistent execution.
Predictions Are Dangerous: In This Guide
Key lessons and practical rules
The original Financial Wisdom guide and media
Evidence, limitations and risk controls
Frequently asked questions
Related guides and authoritative sources
Key Takeaways
Judge decisions by process as well as short-term outcome.
Use written rules to reduce emotional improvisation.
Review mistakes with a journal and measurable evidence.
Discipline cannot rescue a method without positive expectancy.
Original Financial Wisdom Guide
Background and Core Ideas
Trading without prediction is the key to success. Know that anything can happen.
Trading is about probabilities, nothing else.
Expect the unexpected and position yourself for just that.
People take pride in being able to predict what will happen next. Sometimes they get it right, while other times they don’t. The problem with predictions and getting them right is it ends up fuelling people’s egos even when they get it right by chance. This also leads to poor decision habit.
For example, there will always be times when you bought a stock looking at some parameter, and it started doing well from the moment you bought it. The probability says this won't happen all the time and you might have gotten lucky. However, this could lead you to dangerously overestimate your ability and skill whilst increasing your risk, expecting the same results each time.
The same is the case with predictions. The probability of you predicting a coin toss correctly will always be fifty percent, regardless if heads landed 10 times in a row, there is still a 50% chance of either on the following toss. Its a game you simply can't predict for each individual toss (the coin has no memory).
A video on probability and the Casino model below may be of use.
Predictions can be devastating in trading as they make you stubborn and rigid with your positions. This ends up directly interfering with the risk management aspect of trading. Here are a few pointers on why predicting can be further detrimental for your trading career.
It interferes with your trading discipline
Practical Checkpoint
Define the setup, entry and invalidation level before acting.
Compare the potential payoff with risk-reward planning.
Set the trade size using consistent position-sizing rules.
Rules and Practical Application
The most important factor that predictions impact directly is your trading discipline. If you have traded for a while, you will know that trading is quite dynamic and it never moves in a smooth flow.
There is volatility that you have to contend with and you need to have an exhaustive rule book for all kinds of trading situations. Even then, you won't be right all the time. In fact, you could be wrong more than you are right. That’s the likely outcome even after significant hard work and discipline.
When you have formed a view about something in trading, there is always a possibility that you skip following the rules for that 'one' time. That’s sinful in trading because that one time becomes two and several more pretty quickly. If you know you shouldn't do it, don't do it.
An accumulation of these exceptions can quickly deplete your trading capital, pushing you to the side-lines and out of the market, often forever.
The best strategy is to always have objective thinking while trading. You must also take each trade completely independently of the previous trade(s) while following your plan diligently.
No matter how strongly you feel about the trade, you should go in with a stop loss and get out of the trade as soon as the price hits your stop loss (assuming its a trade and not an investment). Similarly, you must position size based on the risk involved in the trade and not on how you feel about the trade.
You must not let your predictive nature dominate your trading discipline. Conversely don't allow fear or hesitation to cloud your objective plan.
One of the best books for keeping a perfectly balanced psychology is Trading In The Zone. - The video below discusses the key aspects:
It dampens your reactionary skills
Evidence Check
Is the sample broad enough to include difficult markets?
Do the results include spreads, fees, slippage and failed signals?
Could hindsight, survivorship or selective examples explain the result?
Evidence and Examples
Trading is all about reacting to whatever the markets give to you.
When you are too opinionated, you won’t be able to react as quickly to various trading situations as you should. Most times, you will react much later, leading to potential trading losses or lost opportunities.
When you take trading as it comes and only react to the ever-evolving market, you achieve an objective state in trading. You cut your losses quickly, you ride your gains well, and steer clear of making impulsive ad hoc decisions.
I often post my personal equity curve from my trading strategy in these post, for no other reason than showing what can be achieved by following a plan rigidly. I go through good and bad times, but following the rules as mechanically as possible, allows me to be completely emotion free.
An example of trusting the process:
Updated:
Nothing is more painful than seeing a trade go south and not being able to do anything about it. Opinions and predictions are never a solace for lost money in trading.
"Follow the plan and keep your risk in check, prediction and hope have no place in trading".
The priority for any trader, therefore, is to preserve capital and not opinions. The agility required in trading is best practiced when the trader acknowledges that he is just a small pawn in the overall scheme of things. A trader’s job is to profit from the market moves and not predict where the next move is going to be.
" we can react to information to improve probability, but we can never predict an outcome with certainty"
Facts change very quickly in markets and opinions always take time to readjust. Therefore, it pays to be reactive than predictive in markets.
Risk and Limitations
It makes you overconfident
People tend to get overconfident about themselves when they get a few of their opinionated trades right. This brews a destructive quality that must not prosper in trading.
All successful traders see their careers go downhill when they become overconfident. If your opinions are feeding your overconfidence, it’s always a good idea to shed them and focus on the facts and probabilities.
There are many ways for overconfidence to creep in without you noticing it. For example, bull markets are the easiest source of overconfidence. In bull markets, you will always have a better win rate and make money. A good bull market performance makes you opinionated about your midas touch, those same opinions going into a bear market can be catastrophic.
Jeremy Lefevbre from the Financial Education channel is a fine example, he started after the financial crisis in 2008, made good gains in the bull market, became over confident in his approach, and has since lost most of it by applying the same approach in the bear market.
The sad part is that bull markets don’t last forever. If you fail to acknowledge the rising tide and credit yourself for all the bull market winnings, you will go into choppy and/or bear markets with the same confidence. That’s when it hits back and takes all that you made and much more.
The final word
More trading careers end because of rigid views and an ego for prediction than any other trading mishaps. The legendary trader Jesse Livermore famously said:
“the markets are never wrong, opinions often are”.
It has been proved time and again that the markets can surprise in more ways than you can imagine. Therefore, it’s always best to keep an open mind about the possibilities in all market conditions.
Summary of the Original Guide
Money will take care of itself when you trade with utmost discipline. Let go of predictions and focus on probability instead.
My FREE Breakout Strategy - 25 page rule book (PDF) is available for all members to use.
Practical Limitations
Historical examples, book claims and indicator results are educational illustrations rather than forecasts. Outcomes depend on the market, timeframe, data, transaction costs, financing, taxes and execution assumptions. Test complete rules across varied conditions and define the maximum acceptable account risk before taking a position.
Put This Into Practice
These ideas become more useful when selection, entry, stop placement, position sizing and trade management form one repeatable process. The Financial Wisdom Trading Blueprint connects those decisions in a practical weekly framework.
Frequently Asked Questions
Can discipline alone make a trader profitable?
No. Discipline helps execute a valid method consistently, but it cannot create an edge where none exists.
How can trading behaviour improve?
Use written rules, position limits, a decision journal and regular reviews based on a meaningful sample of trades.
Further Reading
References and Further Reading
Educational information only. Trading and investing involve risk, including the possible loss of capital. Examples are illustrative, not guarantees of future performance, and nothing in this article is personalised financial advice.
About the Author
Written by Gareth, MBA
Gareth, founder of Financial Wisdom, has more than 30 years of personal trading experience. He competes in the United States Investing Championship, creates award-winning trading content and has been featured in Technical Analysis of Stocks & Commodities.
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