BarroMetrics Views: A Game of Pretence
Let’s play a game of pretence: let’s pretend we went short the AUDUSD and on being stopped out, we wanted to go long but decided not to; and let’s pretend we also wanted to go short the S&P and decided not to.
Now yesterday, the AUDUSD had one of the largest range days (going back to Oct 2010, there were only 3 days with a greater range) and had we gone long, we’d have recovered all our losses.
And so, we remember the AUDUSD we ‘missed out’ on and somehow our memory of the S&P turned from wanting to go short, deciding against it and thereby avoiding a loss to one where we ‘missed’ out on a winning trade.
So what’s happening here?
Hindsight bias and regret: once the market has done what it has done, we often feel we ‘ought to have’ been on the trade and suffer ‘regret’ that we missed out.
The fact is if we trade we will lose money and we will miss out. This is the nature of markets. It’s important to accept this because if our plan has an edge and we avoid the ‘fight or flight’ response that we experience on some losses, our consistent execution over the long run will lead to profits.
So, how do we combat hindsight bias and regret? One very useful tool is journaling. Keeping a record of thought processes and feeling before taking a trade provides a record that goes a long way to allowing us to accept losses and ‘missing out’.