Hindsight is 20/20 as they say.
If any of us were to take a chart, we could easily find support and resistance, draw the trend and support lines and think smugly about how easy it is to see how easy it is to predict the pricing action.
When we look at a historical chart…all of this is easy to do. We can also add our bias to the mix and even find patterns that would have been extremely hard to do if you were to be back in time at certain points within the chart.
But none of us can go back in time to take those trades and make a ton of money. We are all subjected to decide what happens next at the very “hard right edge” of the chart. That next bar has not been printed yet!
Warren Buffet had a great quote:
It’s so easy to look back in hindsight and see so clearly what happened.
Often, there were things that you noticed in real-time that you thought were important, but they really weren’t.
It could have been something you noticed but didn’t really consider too significant at the time, but in reality, it was a huge deal and affected the future direction! Look at the “Great Recession” precipitated by the United States mortgage crisis! Very few people saw that coming, and even fewer saw the real causes that brought about the recession.
Looking back now, it is astounding that the warning flags weren’t easier to see at the time.
The same applies to trading.
We need to keep an open mind and try to see all possible outcomes.
We need to look at all available signs to see if we should take the trade or not.
We also need to be confident in our decision!
Trading takes guts.
Those who don’t trade, really don’t understand how very hard it can be!
Going back in time
I find it fun sometimes to go back and look at previous charts, where I had marked them up with support and trendlines. For example, with Stockfetcher.com – anything I ever modify on a particular stock, is saved. Whether i take the trade or not…the trend and support lines are saved. My notes are saved. Whether I take the trade or not, the info is saved.
Sometimes stocks show up on a screen that had showed up on a screen in the past. My modifications are all there for me to see. It’s interesting to see!
For example, do you remember my blog post about Price Action Breakdown by Laurentiu Damir?
There I analyzed one stock in particular…ATRA. The hard right edge at the time was July 18, 2018. At the time, I thought the stock looked weak, unlikely to get above the control…and certainly not one to get outside of the trading range “box” that Laurentiu would create.
Here is the chart at the time:
Let’s take a look at what I wrote:
In the case of ATRA’s horizontal value area above, this still doesn’t look too promising.
Look at how it struggles to get above, with only a few sharp moves up. Also, remember that we had that wick in the red circle with a big move during the day that was swiftly batted down.
Recently, here in June 2018, the stock moved off of lower part of the value area and wasn’t able to get above the control price…again. It will be interesting to see where this goes, but if I were to guess…this stock is going to breakdown out of the value area because:
- The huge wick (red circle), rejecting with authority any move higher outside of the value area.
- How the majority of the trading has been below the control
Maybe you could make a note to track what happens to ATRA (I know I will).
So where is ATRA now…as of September 24, 2018?
Here is the chart:
It didn’t break out of the “value area” did it? I was wrong about that.
It has hung in there, trading below that control price.
I was right though…it’s pretty weak and certainly not looking like it’s ready to go blasting out of the value area. That control price is some pretty darn strong resistance, isn’t it? On a side note…This is why I love Laurentiu’s methods of pricing action. It works for me!
In any case: here we are again at another “hard right edge”. Where do we go from here? It’s certainly had a decent, albeit slow run up from the more recent bottom around August 15 and has once again found sellers coming out at the control price.
My guess: That control price is some pretty solid resistance, sellers will come out again and it’s going back down. That is some NASTY volume on a red day, right after rejection again at the control price of $41.92 four to 5 days earlier.
Side note: I’m writing this on 9/24/18. I’m not going to change it, update the chart, or even look up the price before I get this posted for you to read. I’ll probably get this posted for you on Saturday, 9/29…so potentially have fun at my expense. Look up the price of ATRA. That’s the reality of trading. That’s the hard right edge. 🙂
What do you think? Higher – Lower – Sideways?
Hindsight Bias Makes Trading Look Easy
Hindsight Bias is when we look at past events and view them as more predictable than they actually really are. Before a certain event has happened, you might make a guess as to what the outcome will be, but there isn’t a way to truly know what is going to happen.
After the event, people look back and believe that they knew with much certainty, what the outcome would have been before it happened. “I knew it all along” is the perfect expression of this bias.
With trading, when we draw our support and trendlines on a chart, slather them with indicators, we look back prior pricing action and see the obvious buy and sell points.
It seems so easy.
It seems so simple.
When you do this, you are giving yourself the false impression that those entry and exit points would have been just as clear in real-time when they happened.
But the fact is…they aren’t.
The real question is…would you have really taken the trade at those points that now look obvious on the past pricing action on the chart?
That is the key to overcoming hindsight bias. Look back and think about the possible directions the price could have moved at that point. Think about all of the possible outcomes.
Shield the chart at certain points to get a feel for what you might have thought at certain points along that chart.
Would you have entered the trade and then been stopped out…right before the trade moved in the right direction all along? If so, maybe you should be trading with a smaller position size, but with a wider sell stop!
Would you have sold too early on a big move up before all of the move has been completed?
In the real world…not the past, we have to pull the trigger and make decisions in real-time. We can’t go back into the past and make our money. We have to make the trading decision NOW.
At the point of deciding whether to take a trade, we don’t yet have ALL of the information. Everything will become much more clear as time progresses, but in real-time, you have to make the best of it and go with the odds of the incomplete information you have in the moment.
That is the reality of the hard right edge…have the confidence to enter a trade, but know that you could be wrong.
That’s what sell-stops are for. 🙂
Good luck with your trading and see you at the hard right edge!
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