Dear Traders,
All of us enjoy making forecasts to some degree. For instance, have you ever seen a sports match and said: “I bet that person will miss”? If you have, this means you were trying to forecast a particular sequence of actions.
As a matter of fact, humans make a wide range of forecasts on a daily basis, from the expected weather to the morning traffic outlook. Nenad and I also make long-term forecasts at the start of each new trading year, but our main focus is on trading itself and short- to medium-term analysis.
The main question is, can traders learn from talented forecasters? Let’s dive right into it and see the five most important lessons for becoming a better forecaster.
Forex and CFD traders do make short-term forecasts when they trade, which are often based on news events, technical analysis and wave analysis. They are willing to take a financial risk based on that forecast (enter and exit trade setups). Many forecasters shy away from such clear numbers and evaluations.
Probably, this is partly due to human fear because forecasters tend to receive negative attention when strong forecasts turn sour and end up inaccurate. However, having that said, the quality of the forecasting topics and forecasters is deep and broad.
Philip E. Tetlock and Dan Gardner took the challenge head-on and built a forecasting project to learn who and why some people were better equipped in forecasting. They revealed their findings in the book “Superforecasting: The Art and Science of Prediction”.(*) Certainly a recommended read.
There are ten specific skills which helped people improve their forecasting skills and made a few of them extraordinary forecasters.
This article reviews five skills which could help you, the trader, take your trading to the next level. Other than that, I’ll try not to spoil the findings from the book but, to sum up, its results, all of us can improve our forecasting skills and results.
A good skill to possess as a forecaster is to recognise the counter-argument(s) of each problem before asserting the prediction. This helps forecasters reconfigure their opinion and formulate a nuanced view of future developments.
The lesson for traders:
Forecasters improved their skill set if they were able to combine their own views and the views of the general public. Superforecasters often searched for comparisons with similar events in an attempt to comprehend the ‘outside’ view.
The lesson for traders: there are a couple of items that traders can implement with this in mind:
Forecasters were much better with their predictions when they managed to balance their confidence. Traders will most likely recognise this warning from our regular weekly webinars.
The lesson for traders:
Good performing forecasters were much better at gradually adjusting their opinion based on small bits of new evidence. They did not emotionally overreact to developing information and carefully weighed their options. On the flip side, they did continuously update their forecasts, often by precise numbers and sometimes even drastically changing course when needed.
The lesson for traders:
Most forecasters retroactively view their forecasting in a much more positive light than reality proves — this is called hindsight bias. The forecasters who performed best also learned best. Their focus was on avoiding this bias and improving their skills with each feedback cycle.
The lesson for traders:
Cheers and safe trading,
Chris and Nenad
Elite CurrenSea
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