Two widely followed market experts have fundamentally conflicting outlooks on the current market. One says bull, the other bear. Who should be believed? This is a question that runs right to the heart of trading psychology.
The Bullish View
Abby Joseph Cohen, the Goldman Sachs senior market strategist, said yesterday that “We do think the new bull market has begun.” The Wall Street Journal says she is calling for the S&P 500 to reach 1050 to 1100, based on an improving economy and corporate profits.
The Bearish View
On the other hand, Paul Tudor Jones, celebrated hedge fund manager, has a decisively different outlook. He categorizes the rally off the March 6th lows as a “bear market rally.” As reported in the CNBC Stock Blog, the Tudor Investment Corp. sent a letter to clients saying, “The bottom line is that we are not inclined to aggressively chase the market here. ”
The Dilemma
How does the average trader reconcile two fundamentally divergent predictions from two recognized experts in the industry?
The best answer to this dilemma is to accept neither expert prediction, but to rely on your assessment of the markets.
Expert Predictions are Usually Wrong
We know from numerous studies that expert predictions – particularly predictions about the future behavior of financial markets – are usually quite inaccurate. Enlightening studies from behavioral finance have had expert panels give forecasts of a wide array of financial metrics and economic indicators. In most instances, the expert panels were off by a significant margin. In one study, the expert panel actually did worse than students.
It reminds me of the WSJ article that surfaces periodically comparing expert stock managers against dart throws. Guess who usually wins!
Listening to expert opinion runs contrary to good trading and good trading psychology. Based on the evidence, the odds of winning with expert opinion is low, perhaps exceedingly low.
How it Affects our Trading Psychology
Although we all like to be right and may believe that others must know more than we do, when it comes to the markets, this is just not true. When we listen to others we are affecting our own trading psychology in negative ways. We are relying on others to make decisions for us, rather than on our own knowledge, skills, and abilities. Trading is a game of independence; listening to expert predictions leads us into an unhealthy dependency that keeps us from developing sound trading skills.
What you can do
Expert predictions are just more of the noise of Wall Street. It’s really best not to listen. Instead, ask yourself what would it look like for the market to begin falling back into a bear market? What would it look like for the market to continue the current rally? Develop your own understanding of bear and bull moves and then put yourself into the position of being able to anticipate (rather than predict) both. If you spend time anticipating what both would look like, you will be in a position to act appropriately when you see one or the other occur. This, and not following an expert, will help you develop a true psychological edge for trading the markets.
Keeping current with advances in the field of trading psychology will help your trading. You are invited to visit Dr. Gary’s blog where cutting edge research and techniques to develop your skills are discussed: http://www.tradingpsychologyedge.com/blog
When it comes to trading, the technical side is only part of the picture. The mental side is just as important. For a free, seven-part e-course on developing your trading psychology skills, you are invited to visit http://www.tradingpsychologyedge.com
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