Future prediction for dummies

We are not as smart as we think we are

Hi friend,

I’m currently spending some time on Scroll 5 of the book The Greatest Salesman in the World.

Those of you who know me know how I’m always looking to improve myself and that is a good book on mindset.

Scroll 5 is about making the absolute most of the present, living today as if it is your last.

I’ve always lived more in the future than in the present.

I’m this little kid who can’t wait to see flying cars. Naturally, I’ve always had resistance when someone tells me to focus on the present. Don’t kill my dreams.

In investing, this has been an edge for me as I have been quite good at predicting the direction of technological progress.

Unfortunately, this limited me to the tech sector.

Elliott Wave Analysis allowed me to predict across sectors so I dived deeper once I had learned the tool.

But how can it be that the future becomes seemingly predictable?

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In the last email, I mentioned the wisdom of crowds and Fibonacci, in addition to the economic cycles.

Let me clarify.

The economic cycles are the outcome of our collective human behavior.

The wisdom of crowds theory suggests that large groups of individuals with diverse backgrounds and levels of knowledge can collectively produce more accurate information and make better decisions compared to single experts, particularly over time.

If we consider the financial markets as a global sentiment gauge because people are more emotional than rational on average, the wisdom of crowds is the price-balancing mechanism.

And here you have your first level of future prediction for dummies.

Take a step back and take a rational look at what emotions you are currently seeing as dominant behind the decisions in the market.

Are we off balance?

Then soon things will change in the opposite direction.

This is why it is so common to recommend beginner investors to be contrarian if all else fails.

Be fearful when others are greedy and be greedy when others are fearful.

Sounds super smart. Try doing it in practice. We are not as smart as we think, neither as masses nor individually.

Being aware is already an edge though.

But how do we know when the sentiment will change?

It turns out that nature likes math.

Fibonacci came up with the infinite number sequence 0–1–1–2–3–5–8–13… where the next number is always the sum of the preceding two numbers.

This sequence appears again and again in nature, from Romanesco broccoli to sea shells, as well as in us humans, from the cochlea in our ears to the iris patterns in our eyes.

What if sentiment cycles followed Fibonacci patterns as well?

A certain Ralph Nelson Elliott decided to test that about a hundred years ago and came up with the Elliott Wave Theory and subsequent wave counting and analysis.

The Elliott Wave Analysis allows us to see which patterns in price charts are most probable to develop next and forecast the price movements.

We cannot know precisely, but we can know when the probability is more than just a hunch.

Couple that with good market execution skills and you have another edge to add to your repertoire of investing tools.

So which patterns are you following? With the crowd or against?

Have fun and make profits,

Chris

Thank you for reading! :)

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