Trading is all about taking a risk based on incomplete data and becoming an expert at this should lead to profitability.
Learn from the mistakes you make but make sure the lessons are the right ones.
Using historical charts can lead us astray because in hindsight, everything is obvious. So how do we avoid thinking that the past will equal the future?
Be An Expert Hindsight Trader
Looking back on the market in hindsight allows us to see the obvious, but only because we have all the facts at hand as to what subsequently happened. Reviewing the market like this is useful to the extent that you can see how it developed in respect to your various reference points.
But if you are trying to achieve the ultimate goal of being consistently profitable, then is this what you need to be looking at?
My argument is no, it’s not and here’s why.
When a trader who is either yet to be profitable or is struggling looks at what has happened and why they lost money, they are looking for what they “should” have done in those specific circumstances. Emotion leads the mind to looking at the “nice” moves and ignoring what didn’t work.
We will find what we seek and if all we are looking for are the places we would have made money, that is exactly what we will find.
In my experience, this unfortunately leads to a right or wrong type attitude and masks the information salient to making positive changes to your trading.
You Can’t Ignore The Ones That Didn’t Work
When you search for what works in this way, you are kind of doing a form of curve fitting and skipping over the places where the same things did not work. This leads to the tendency for denial when a trade doesn’t work even though it looks almost exactly like that one from yesterday that was a great trade.
Remember, you’ve probably missed those times when in the same period, the trading setup didn’t work at all or at least spent much more time looking at the ones which did work. Then you get the emotional stuff come into play which we all know about.
Trades don’t work sometimes regardless of how perfect the set up is. If you have done proper testing, you’ve seen the expectancy of your trading strategy including how many losses your trading system can take.
Denial in trading in terms of skipping the losing trades and only seeking the winning trades, is deadly.
But You Can’t Ignore History
Looking over historical charts is important and I do it just as I’m sure you do too. But using it to identify the market’s current behavior or to work out why you didn’t make money, are not always the same thing.
So what is the salient information?
- Where you traded and whether it was according to your plan is a start.
- What your overall emotional state was at the time
- Where your stop should have been and if you took it
- Did you exit in a timely manner or hold on for too long/too short a time and what made you do this?
- Where else might you have taken trades within (or outside of) your plan and what would the result have been?
None of these things are about where the best trading opportunities were. We don’t know for certain how good a trade will be until it is completed. Historical charts can and will make your view biased if you’re not thinking in this way.
Think of historical charts as potential…not probability.
The quote at the beginning of the article is one I always try to remind myself.
To help make sure you stay objective, please download our trade tracking software, The Ultimate Trade Analyzer, here.