How Investors Anticipate Trends To Find Profits

Technical analysis is a useful tool that can help a trader to anticipate certain market activity before it occurs.

This ability to anticipate price movements results from monitoring market indicators, studying chart patterns, understanding the probability of certain trade setups, and trading experience.

Over time, experience, patterns, and likely price movement can eliminate the need for an investor to over-analyze market direction. Instead, they can identify clear, objective areas of significance.

Key Takeaways

• Traders use technical analysis to help them identify price patterns and trends.
• Taking a market position that follows the trend can result in a profit,
• You can anticipate outcomes when you are familiar with chart patterns and related trade results that both play out repeatedly.
• Solid experience with trading and technical analysis is crucial to successful anticipation.
• Good traders anticipate the potential for losses as well as market moves that lead to profit.

Anticipation, Not Prediction

Technical analysis is often referred to as black magic used to time the market. However, what many inexperienced investors don’t realize is that traders don’t try to predict the future.

Instead, they create strategies that have a high probability of succeeding in specific situations. When they see these situations unfold, they can anticipate market movement and take advantage of it.

Let’s face it, if traders could pick tops and bottoms on a consistent basis, they would be spending more time out in a Ferrari convertible enjoying a nice stretch of highway than they would hunched over their computer screens.

Many investors have tried picking tops and bottoms, without success. But perhaps you’ve followed in the footsteps of professional traders who look for market patterns that allow them to take a rational position ahead of an anticipated market move.

Tools That Support Anticipation

When deciding whether or not to make a trade, you likely have your own strategies for entering and exiting the market.

Technical traders use certain tools such as the:

• Moving average convergence divergence (MACD)
• Relative strength index (RSI)
• Stochastics
• Commodity channel index (CCI)
• Chart patterns that precede a certain result

Experienced traders will have an idea of the outcome of a trade as it plays out. If the trade goes against them as soon as they enter the market and it doesn’t turn around within the next few chart bars, odds are that they weren’t correct in their analysis.

However, if the trade works in their favor, then they’ll look at moving their stops up to lock in gains as the position plays out.

While some traders prefer bar charts for their primary charting tools, others use candlesticks or line charts.

Example

The chart below illustrates the power of a trade that uses an exponential moving average (EMA) crossover to determine when to be long and when to be short. It involves the British pound/U.S. dollar (GBP/USD) currency pair.

The blue line represents a 10-period EMA, and the red line represents a 20-period EMA. When the blue line is above the red line, you’d want to be long, and when it’s below the red line, you’d want to be short.

In a trending market, this is a powerful trade tool because it allows you to participate in the move that often follows a crossing over of the lines. Note though that the first arrow shows a false signal, while the second shows a very profitable signal.

Anticipation and Trade Management

This is where the power of anticipation comes into play. The active trader typically monitors open positions to see if any adjustments need to be made.

Once they’d gone long at the first arrow, within three bars, they’d already be down more than 100 pips. Anticipating a potential reversal, they’d have placed a stop in line with the longer-term trend moving average.

But they could get back in when the second arrow shown on the chart signaled a buy. Once long, it would take only a few days before this trade went in their favor.

Manage Trades To Protect Profits and Limit Loss

Trade management is essential to successful trading. It involves a trader moving a trailing stop to protect a profitable position or to get them out before they lose too much money.

In this case, they could have used a closing price under the blue line as a stop. Or they could have waited for a close underneath the red line (longer-term moving average).

By managing their position with stops and accepting the offsetting trades, traders are far more likely to have greater returns in the long run. Inexperienced traders who don’t anticipate unfavorable outcomes might remove a stop right before the market blasts through it.

Understand Patterns and Results, Anticipate Outcomes

The above chart helps illustrate the difference between anticipation and prediction. We anticipate that the trade will have a certain result, based on the results of previous trades in similar circumstances that we’ve observed

The patterns encompassing the two signals were nearly identical. All things being equal, going long at the second signal therefore could have a decent chance to work in our favor.

So did we make a prediction about what would happen in this case? Absolutely not. If we had, we wouldn’t have put our stop-loss in place at the same time the trade was placed.

Unlike anticipation, which uses past results to determine the probability of future ones, making an accurate prediction often involves a combination of luck and conjecture. This, in fact, makes the predicted results much less reliable.

Limit Emotion

By monitoring trades and adjusting stop protection accordingly, we ensure that emotions don’t intrude and force a deviation from a tested strategy. Our strategy originated before the position was taken, so we use it as our guide when the trade is active.

We know what the market will look like if what we anticipate does or does not prove correct. That can help minimize emotion-driven trading. The key is to take ownership of your trades and act based on your trading plan, market patterns and trends, and trade results that occur repeatedly.

What Does It Mean To Anticipate Trends and Trades?

It means that you use your experience with technical analysis, watching market movements, and actual trading to prepare you to take advantage of potentially profitable trends and other market opportunities.

How Can I Learn To Anticipate Good Trades?

In order to anticipate a good trade, you must have knowledge of and experience with markets and potential trades. So, become educated in charting and technical analysis indicators. Learn to watch market price movements and recognize patterns that set up trades. Gain experience placing trades and managing them to avoid too great a loss in the event that the market moves against you.

Can I Take a Position When a Trend Has Already Begun?

Yes, and in fact, that is how many investors make solid returns over long periods of time. They buy and hold to take full advantage of an upward moving trend, even if a market has been climbing for some time. But traders have different objectives. For them, anticipating a short-term trend or a reversal of a trend based on patterns they recognize can be a profitable goal.

The Bottom Line

Objectivity is essential to trading survival. Technical analysis can back up anticipation in a clear and concise manner, but as with everything else in life, it’s no guarantee of success.

However, by sticking to a trading strategy day in and day out, you can minimize the role of emotions in your trading and allow well-supported anticipation to function.

With time and experience, you can learn to anticipate the direction of markets and your trades. This may improve your chances of achieving better returns.