Stock market commentary, analysis, insight and opinion of the RightLine Editors is available every Tuesday/Thursday evening & Saturday
afternoon. The following is excerpted from the:
July 16, 2020 - The RightLine Report
Notes From The Editor
"Farewell to the Hindsight Bias - Part II"
It's human nature to look back on past events and see them with total clarity, forgetting that their outcome wasn't such a sure thing before they happened. As we discussed recently, this tendency - the Hindsight Bias - can wreak havoc on a trader's psychology and profitability.
Fortunately, it doesn't have to be this way. While there will always be those occasional moments of frustration looking back at missed opportunities or trades gone bad, here are some simple steps you can take to short-circuit the Hindsight Bias and its vicious cycle of careless trading and utter paralysis:
- Embrace uncertainty. As traders, we pride ourselves on being able to correctly predict outcomes in a chaotic environment. But even the best among us aren't able to do this every time. When you "miss the boat" on a big winner or find yourself exiting a position for a loss, use it as a learning opportunity. Rather than hammer yourself with the Hindsight Bias, simply ask yourself what you could have done differently, and what lessons you can apply to future trades.
And to use a familiar adage, there are lots of fish in the sea. The frustration over missing a great trade disappears in a flash once you realize how many other possibilities are coming down the pike.
- Assess your threats. Fear of the unknown is the #1 reason traders fail to pull the trigger on solid set-ups. If you find yourself constantly regretting missed opportunities, try researching the different factors that could impact your position. Everything from stock-specific news to market technicals can help you paint a clearer picture of what's on the horizon - and in turn, give you the confidence you need to jump onboard.
- Manage risk. Trading paralysis stems from the fear of losing money. The natural remedies are stop placement and position sizing. The latter ensures that you don't put too many eggs into one basket, while a stop-loss limits your potential losses.
- Diversify. One of the great things about position sizing is the way it frees up your resources for other trades. When contemplating a tempting set-up, it helps to know that you've still got some powder dry for other stocks. This eliminates the perceived opportunity cost of entering a new trade, thereby making it much easier to pull the trigger.
Here's to profits!
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