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If I’m extremely good at predicting socio-economic events, would I make a good trader?

Posted By Scott Philips On Wednesday, December 21st, 2016 With 0 Comments

I realize there’s many other qualities that you need, but I wonder whether this would help with trading.

Predicting the future is generally a poor way to go about extracting money from markets for two reasons.

Firstly, as soon as we come up with an opinion we naturally start to believe our opinion and gather evidence to reinforce it. It becomes extremely difficult, but not impossible to notice contrary evidence accumulating. This is a cognitive bias called confirmation bias.

Secondly, quite often the market’s reaction to a given news event might be baked in to the price already, or completely weird. Perfect example is the recent election. “Everyone knew” that a Trump win would crash the markets, which it did for a few hours, then proceeded on a powerful rally.

Socio-economic perception in the right hands is a powerful tool, and many of the legendary global macro traders use it. Read George Soros’s “the reflexivity of finance” for the master work on this. But it’s a smallish puzzle in the overall picture, and risk control is far more important, for example.

That being said, successful traders have to leverage their strengths (Dr Brett Steenbarger) and if you have genuine skills (and are not deluding yourself like someone who enjoys tarot cards) then you could conceivably build a powerful method doing this. Expect it to take at least 5 years of full time work to get good enough to be profitable, this type of complicated macroeconomic trading really is very difficult to get right on a long term consistent basis.

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