The purpose of Market Forecasting is to determine, with a high degree of accuracy, when the market is likely to start a new leg up or down. In other words, the plan is to ‘when’ the market is likely going to make a new top or bottom.
Now why is that important?
Trading is all about probabilities and risk. You first determine the probability for the direction of the market, and then you must determine the risk exposure if you were to take the trade.
What Market Forecasting attempts to do is to find the right time to enter the market where the risk exposure is as low as possible while the profit potential justifies the risk.
Since 1988, I’ve dedicated thousands of hours and dollars in pursuit of sharpening my market forecasting skills. Has this paid off? Absolutely! The payoff occurred early on in my trading career, following my first account wipe-out. Having to replenish my trading account following one very bad trade back around 1991, I was at a point where I could not afford to take big risks due to the small size of my account. Trading the futures markets back then, we did not have the luxury that many beginning traders have today, such as opening mini-Forex accounts. So realizing that just one futures contract could put you in a deep hole fast if you are not immediately correct in your timing, I focused all my efforts on learning the skills and secrets to precision market timing.
Market Forecasting became the vehicle that provided me with high probability “turn points” in which to plan my trades around. When the calculations were such that signaled a high probability for a new top or bottom, I looked for an opportunity to trade in the new direction expected.
Most of what is needed to be good at Market Forecasting is actual experience. While there are many ways to isolate high probability turn points, knowing how to deal with these turning points is also very important. The reason for this is that each turning point presents its own set of questions that must be answered.
For example, if the turn expected is a bottom, you need to ask yourself whether your suspected bottom is at known support. Is the market currently oversold? Is the trend currently bullish, or am I trying to catch the very bottom of a bear market? Are there any other indications that support my assumptions? If I were to take this trade, where would be the logical price to put a protective stop-loss? Is the amount of risk exposure justified for the amount of upside potential I suspect is available?
While predicting market tops and bottoms has its obvious advantages, it is how these predictions are actually used for trading that will determine whether you are profiting or not from your calculations. It is the foolish and inexperienced trader that thinks he/she can just find some useful market prediction method and immediately become a trading phenom. The smart trader is the one that realizes that, along with a very good forecasting (timing) method, practice and patience, along with good old fashion experience, is also a major requirement.
Every market behaves in predictable ways. While this may not be obvious at first to a new chart reader, simple technical techniques such as trendline analysis, even oscillator indicators (Stochastic, MACD, %R, etc.), can give you insight as to ‘when’ the market is ‘likely’ to change direction.
While no method is 100% foolproof, consider the simple Gann or Fibonacci retracement method. By first determining the trend of the market for the time frame you are currently analyzing, any time the market moves against that trend, you look for it to move 37%, 50% or 62% against the last move that was with the trend. In other words, if the trend is bullish and the last move up from a top to bottom was 100 points, you would then look for price to move down about 37 points, 50 point or 62 points. These ‘support’ levels, if they happen to also coincide with a trend line you have along previous bottoms upward, can often signal a turn point.
Another simple method is to count price bars. From any significant top or bottom, count forward 30, 45, 60, 90, 120, 180, 270, 360 trading days and calendar days. This is something that was taught by W.D. Gann, amongst other methods. When these time periods arrive, see if you get other indications to support a top or bottom likely.
Whatever method you learn and use, keep in mind that profiting from Market Forecasting requires you address each turn point with the seriousness it deserves before you trade it, as discussed earlier. Enter the trade only when your assumptions have been proven correct, and place your protective stop-loss where your assumption has proven wrong.
By taking advantage of Market Forecasting methods and methodically filtering each calculation with other supporting factors, along with good old fashion practice and experience, you can really extract excellent profits regularly from the markets with low risk exposure.