Insight to Hindsight - Be aware of it's limitations

Here is an excerpt from an recent interview with Richard...

Q. what’s your take on hindsight bias and hindsight.

A. Problem with hindsight is that it can be damaging. When trading live, you don't know what's going to happen. You'll never know what's going to happen. It can go either way for as long as it wants to, and you have no idea of the outcome in a live environment.

And the problem with that is, when looking back in the charts and seeing the trades from the previous day, even when you're trading on a trade simulator and you know what's already going to happen, it's very easy to get a positive outcome because you’ve got the feel for the market and what it's going to do.

When we're trading live, we are basically putting our position on the market with a completely uncertain outcome. You have no idea what it's going to do or whether it's going to be a big hundred-point runner or is it going to be just a 20 point and flip around to stop you out.

The idea is for us to always assume that it's going to go for 80 to 100 points. So, your target should always be as far out as possible. Even have no target at all. There are plenty of traders out there that don't have targets.

Now in other prop firms, they'll read the tape to assume where a target can be, this is probably an order block, or they may use TA or SR levels for targets. But you can still miss out on some big runners by doing that. Trailing your position down on the last fractal high or low, or up or down, whichever way, direction you're going, will give you the best outcome there is because, if it is a big runner and you want to capture it.

In addition, we use Rule 6 of Dow Theory which states “a trend will stay intact until it gives a definite reversal signal”.

Now, the worst thing that can happen to you is that you assume that the runner will go for, let’s say at 40 points on Dax, and then it keeps running for another 40 points or 60 points to make it a hundred points runner, then that can be psychologically damaging.

You'll sit there and criticize yourself and be upset about it. And every time we have a criticism of ourselves in such a scenario, we're damaging ourselves. We're not giving ourselves the support that we require to be able to take next trade.

Trading on a simulator when you know what the outcome already is, also dangerous. This is why getting somebody else to randomly select the day for you is better than you having a sneak peek before starting the replay.

Nonetheless, even if you do know what the outcome is, it's still better to do that than to do nothing, because you get used to what the signals look like so that you can take them, and you can take them correctly.

But like all simulations, back testing, et cetera, there are components within it which don't relate to a live environment. We must get together a set of rules on how you are going to act when your signal comes up. How you are going to decide on how you trail your stop or what you do with your stop.

And if you are going to put a target it needs to be able to accept the biggest outcome possible. Because unfortunately I've seen a lot of guys, including myself, that cut it before it finishes. We don't get the maximum that we can out of that trade.