Trading seems like it should be easy. A couple of mouse clicks here and there. Buy low, sell high. Pick a stock, buy it, wait for it to go up and sell. Easy, right?
But somehow, spectacular, consistent success eludes you. What gives? What is especially confounding is that it always seems crystal clear what you should have done when you look back.
Welcome to ¡°hindsight bias.¡± There are many factors that separate successful traders from those who consistently trash their trading account. One of the most important of these factors is that successful traders learn from the past without judging themselves too harshly for their ¡°mistakes.¡±
Let¡¯s examine this notion of a trading ¡°mistake¡± for a moment. At the moment you made a ¡°bad¡± trade, you used the best information you had available to you at that time and took the trading action you did. You had to weigh a number of factors, some of which may have conflicted with each other. If that description does not describe your trading process, you have no business trading.
So why do bad things happen to good trades? The answer is simple: Because they can. You are in the perilous business of guessing the future. Trading is all about risk¡ and reward. Manage your risks and the rewards take care of themselves.
The human brain is constructed to do certain things well. There are other things it does not do well -- like comprehending the world of probability and odds. The brain likes to have clearly defined ¡°yes¡± and ¡°no¡± situations. Fuzzy ¡°maybes¡± easily lead to confused decisions. This is what happens way too frequently when you trade.
This chronic, nagging confusion resulting from weighing vague and conflicting information sets you up to second guess yourself. You ask yourself, ¡°Why didn¡¯t I see that (at the time)?¡±
Be kind to yourself. You are trying to do something that is extremely unnatural to the working of your brain. You are trying to make decisions when the information available is incomplete and contradictory.
Warning: if this is not how you experience the trading decision process then it is likely you are setting yourself up for a fall. Doubt and confusion are a natural, even necessary part of the trading decision process. Confident certainty usually means you are missing something¡ either that, or you are working with inside information.
I repeat: Be kind to yourself. You will make mistakes. You cannot separate out the good decisions from the bad until after the fact. That is the nature of trading.
Harsh second guessing can cut your trading career short before it really starts. Don¡¯t let yourself fall for this trap.
Doug Newberry is the editor of the Market Toolbox Newsletter & host of The Market Toolbox "On Demand". The Market Toolbox is an online radio show dedicated to disciplined systematic investing techniques for stock traders. More than 30,000 investors and stock traders from around the world subscribe to the Market Toolbox newsletter. Learn more about Hindsight Bias at Stock Pick.
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