Hindsight bias embodies any combination of three aspects: memory distortion, beliefs about events' objective likelihoods, or subjective beliefs about one's own prediction abilities. Our trading kit is the best free resource out there for new and struggling traders.Hindsight bias occurs when people feel that they "knew it all along," that is, when they believe that an event is more predictable after it becomes known than it was before it became known. Don’t let other traders on Twitter and analysts fool you with hindsight analysis. You need to backtest and have data to assign a probability to any given scenario in trading. You cannot let hindsight bias determine whether a trading decision was correct or not. Winning traders don’t let what happens after they enter or exit affect what they do on the next trade. What happened after your decision did not determine whether you made the correct decision or not. 9/10 times buying penny stock up 300% on the day will not work. But in trading, the correct decision isn’t determined by the outcome of 1 trade. In hindsight, it looks like you made the correct decision because you made money. Most of the time a penny stock that is up almost 300% will not follow through to the long side. You made money, but did you make a high probability decision? The answer is no. Here’s an example, but in the opposite scenario described above: You decided to trade $CEI yesterday, and you bought it at $8 and sold at $9: Even if the stock fails and you lose money, you did the right thing. What happens after you enter doesn’t matter. Once a stock gives you a setup that you KNOW makes you money in the long run, it is your duty to be in the stock no matter what. What happened after does not validate your decision.Įven on a setup you have a 70% win rate (and a solid risk vs reward on), there is still a 30% chance of it failing. A stock goes in any direction at any given moment. It is based on the probability of what was happening at THAT moment. The correct trading decisions are actually not based on what happened after you made the decision to buy or not buy (or short or not short). In order to overcome hindsight bias, you have to think in terms of probabilities. But you won’t be able to actually make money from the markets until you learn how to capitalize on opportunities BEFORE the stock makes a move. It is easy to seem like a genius in the markets by talking in hindsight. Hindsight analysis tells you nothing about how you could capitalize on a similar opportunity in the future. When it goes down, they say its because of trade war concerns weighing down the overall market (or whatever major geopolitical issue is going on in that moment). When Facebook’s stock goes up, analysts say its cause of its great fundamentals. In mainstream finance, hindsight analysis is pretty much the norm. But was it so obvious that you bought too low or sold to high at that moment? Would you be saying you did something wrong if the stock went in your favor? Hindsight Analysis It is also easy to say “ I should’ve sold higher” when the stock kept trading higher. It is easy to go back and look at a trade and say “I should’ve bought lower” because the stock traded lower than your entry for a period of time. “If I held and sold there I would’ve made 10 grand.” “If I bought there I would’ve caught the whole move”. In trading, everything seems obvious hindsight. It is one of the most common reasons why traders cannot improve their trading results. This is a phenomenon witnessed in trading on a regular basis. The textbook definition of hindsight bias is the psychological of people to overestimate their ability to have predicted an outcome that could not possibly have been predicted. Let’s start by defining exactly what hindsight bias is: What is Hindsight Bias? In order to become a consistently profitable trader, you have to learn how to combat this psychological issue that you will face on a daily basis. Hindsight bias is one of the most common psychological issues that stop traders from objectively viewing their trading results, and figuring out methods to improve them. Most of the issues all lie within your self. What makes it so difficult is not that the system is rigged against you, or anything external. It’s no secret that trading will be one of the hardest endeavors you will ever attempt.
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