One of the major reasons why many traders remains as the loss making trader. Because rather than understanding the price behaviour they try to assume the price direction. However the there is huge difference between these two terms “predicting” & “reacting” from trading point of view. Although some traders call their prediction as the analysis. Meanwhile the analysis includes different things like price behaviour, direction, fundamental & technical analysis and etc. However the market doesn’t reward someone who predicted the price correctly. But it rewards who takes good decision at the time of placing the trade.
Having a deep knowledge about the predicting and reacting to the price will improve the trading, discipline, psychology etc. Let’s understand one by one what is predicting and reacting in the trading.
What Does Predicting Mean in Trading?
Predicting in the trading involves making the rough estimate of where the price may move further in the future. However traders use this form to test their analysis in the live market before placing the trade. Meanwhile the predicting of the price doesn’t involve any analysis. It is based on the fundamental data most of time. Due to some news event the market may fall till here or the market may rise till there.
Fundamental Analysis
This analysis includes having the knowledge about economic events in the world. Meanwhile in short important news like cpi, nfp, rate cuts etc. Traders uses these new or events to make their trade favorable according to the market condition.
Technical Analysis
This cover the understanding of repeated patterns and events in the charts. Prediction of the price impacted by the candles or the patterns formed in the markets. Because it tells you in which direction price can go further. Absence of this analysis can make your trading worse.
The Problem With Prediction-Based Trading
The prediction based doesn’t work well most of time. Because it doesn’t cover liquidity, supply, demand zone and etc. So when it doesn’t includes anything essential then it’s a gambling instead of trading. Let’s understand how you are gambling in markets while approaching this method.
Gambling
Just like gambling you can earn money instantly from the markets. But ultimately it doesn’t last longer. Because here you win but some other platform you may lose because in everything you can predict. But it doesn’t assure you the profits and this can make your account zero very soon.
Holding Losing Position
When the traders trade the prediction based trading. they hold the losing trades usually. Because in order to make their prediction right they tend to hold losing trade more. Conversely they cut their winning trade in the early stage just to make themselves feel right.
Remove Stop Loses
Prediction bases trader often ignore stop loses. Because they think the more market will go deep, the more it will rise in the upside.
What Does Reacting Mean in Trading?
Reacting in trading refers to adjust yourself and your trade according to the market conditions. Rather than forecasting price for it’s future directions. They wait for the confirmations and let the market align to their set of rules and trading conditions then only they trade. A Reactive trader often wait for the specific signal in any direction and execute the trade according to their strategy.
Reduce Ego & Emotions
The reactive trading protects you from forcing a trade, overtrading etc. Because you know the nature of the market it can double the loss and reduce the profits anytime if you keep trading.
Improves Risk Management
Reactive traders wait for the market to align to their trading criteria like entry confirmation candle, stop loss etc. Which tells you when to enter in the trade, entry price, exit price stop loss and all.
Adapts The Conditions
Market movements relies on the uncountable factors like supply, demand, accumulation, liquidity economic events and etc. Reacting trading ensures that the strategy remains flexible and adaptable to the changing environment of the trading.
Why Successful Traders React Instead of Predict
Pro traders chooses react rather than predicting the price because they know the uncertainties and unpredictabilities. These two terms of the trading often leads to emotional which dents the trading accounts most. Meanwhile reactive based trading involves some terms and conditions and plan before executing and placing the trade in the market.
Rules Above Ego
Predicting the price often result holding on to the losing position more. Because their ego drives their decision which results holding these type of position until the market make the reversal or capital blow out. Meanwhile reactive trading has everything if the price goes against the analysis or moves in analyzed direction. This helps to remove the emotions and make your trading based on market sentiments.
Confirmation vs. Anticipation
A reactive trader doesn’t make their entry in the trade until the market meets the certain criteria of entering. Meanwhile prediction based trading doesn’t involves any criteria. However it is purely based on guessing basis entry.
Remove Emotions
When the execution is based on the certain criteria it automatically eliminate emotions from the trading. Because most of the rules are being made according to the trading capital account. And the main motive of the rules are to protect the trading account. Which eventually leads to develop the discipline and remove emotions.
Practical Ways to Become a Reactive Trader
Reactive trader observe every scenario and sentiments of the market before starting the day or before making the entry into the trade. Meanwhile this trading system doesn’t include making the entry at the bottom and exit the trade at the peak. However the trading success requires the shift from the prediction based trader to the reactive based trade with strict trading rules and disciplined execution.
Aim On Scenario
Rather than trying to capture the whole move. Prepare the trade in such a way if the market goes against you then it should not leave a big dent on your trading account. Meanwhile trade with proper tp if market trades in your analyzed direction and put stop loss to limit the loss if market initiated the movement against your direction.
Allow Price Action Guide Decisions
Wait for the confirmed entry signals or confirmation by the price. Don’t let the fomo force you to take the entry in the trade. Rather than placing the entry on the expectations, let the market give you the evidence of making the entry into the trade.
Accept Uncertainty
Trading with the uncertainties in the markets is the quality of the pro traders. However the goal isn’t to look what can happen in the future. But the goal is to manage the trade regardless of something happens.
Analyze The Trades Objectively
After every trade conduct the assessment of trade. It should include did the trade follow risk management, stop loss as per trading rules, entry or exit signal, risk to reward and etc.
Ending Thoughts
Long term success in trading need a shift from prediction to reaction based trader where decision is taken according to how the market is behaving in current situation.
Prediction demand guarantee of the profits.
Where as reaction based trading requires a trading, cover risk management, stop loss, entry exit confirmation etc.
Nobody can predict the future of the market because the movement of the market driven by many factors. Meanwhile the reactive usually performs well in the long run of trading. Because they have a system to help them in the long run of trading.
Success in trading requires to respond effectively and efficiently to the whatever information available in the markets.
Read my previous blog on Being right vs Making Money