One of my colleagues here at Elliott Wave International is an ex-psychologist turned Elliottician who's been forecasting and trading since the mid-1980s. He once told me this:
"A good trader will make money with a mediocre forecast. A bad trader will lose money even with a good one."
As I watch the markets day after day, I think about that adage more and more often. It's so profoundly true! Novice traders (and investors) usually think that an accurate forecast is all they need to succeed in the markets. You read one, you open a trade, and then you close it. Buy low, sell high, wham-bam – you're rich.
That happens only if you're really, really lucky. But let's consider a more probable trading scenario. We all know we're in a bear market. So, let's say you get your hands on a forecast that says that your market of choice – a stock, ETF, futures contract, option, currency, whatever – should fall from 120 down to 90. The next morning, you're at your computer, and just as trading opens, you short it. Let's even say you get filled at 120.50. (Hey, an extra half-a-point of potential profit, nice!)
You watch the market in the first hour, and it's fallen a little, range-trading between your entry and 119. So far, so good! But in a split second… the market rallies five points. It drops a little from there – but then adds another six points. Now it's trading at 129, and you're staring at an 8.5-point loss – or, in percentage terms, seven percent. Not exactly peanuts.
What do you do now?
This is the moment that separates the men from the boys. Some traders would panic and sell – only to watch the price fall from 129 back to 120 an hour later. Other traders will hold on – and watch the market rise another five points, now leaving them eleven percent in the red.
Yes, you could have used a stop-loss. But where do you put it? Two percent above your entry point? Five percent? What if the market first rallies three percent, triggers your stop – and then reverses in a decline to 90, your original target? Sounds like a fantasy? Only if you've never traded before.
The forecast you had was perfectly good: Indeed, prices did drop from 120 to 90. But the market took its time, it didn't fall in a straight line, and it tested your nerve more than once. And, despite the correct forecast, you walked away with a loss.
That doesn't make you a bad trader. But an inexperienced one? Probably. And unless you were born to trade, the only thing that will make a difference for you are the lessons of experience.
Of course, experience takes time to acquire. You may lose a lot of money (and sleep) in the process, too. Are there shortcuts? I only know of one – namely, find a teacher. Let them tell you about their market experiences. Replace their months or years of being beaten by the market with a few days of learning.
The first thing a good teacher will show you is his "method." Now, having a method doesn't guarantee success, yet NOT having one all but guarantees failure. At EWI, Elliott wave analysis is the method we have practiced for 30 years, since 1978. It's uniquely suited for trading – most of all, because it's an analytical method that becomes a trading tool. Often, one look at a chart will tell you whether to 1) walk away, or 2) pull the trigger, and when to do it. And it'll help you manage the trade till the end, too.
Now is your chance to learn Elliott in a live 2-day setting at an upcoming Intensive Elliott Wave Trading Course, "How to Trade in a Fast-Moving Bear Market." We have just a few seats left.