Outguessing a trading system?
Understanding why we do things that are not in our best interest and how we correct and continue in our trading methodology is an insight into human behavior itself.
Why we sometimes outguess our trading system:
We like to think of ourselves as risk takers, but what we really want is a guaranteed outcome with some momentary suspense to make it feel like the outcome was in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring. The feeling is not unlike going to a horse race and having your horse come from behind and win the race.
However, when it comes right down to it, no one trades to lose or places a trade believing it is going to be a loser, and all systems will definitely have some percentage of losing trades. So it’s difficult not to be tempted into trying to guess which ones are going to be the losers and therefore not participate in those trades.
Secondly, we often convince ourselves that “in this case” our expectations about a particular trade will be different because our method or previous back-testing doesn’t take into account current market momentum, news or “this time is different” market bias etc. Consequently this sets up a conflict between what our system says we should be doing and our own contradictory prediction of what will happen in the future. In the current trade, we entered the market at a high, which is counterintuitive, but the system is right close to 80% of the time in the last couple of years, so why question the outcome?
Lastly, if we risk our money on a gambling event that we know has a random outcome, then there’s no rational way we could have predicted what actually happened. Back to our horse racing example, if you picked the horse because you liked the name as opposed to an analysis of the form, trainer, handicap, race history, age, betting odds and jockey, you could be forgiven for not predicting the outcome of the race. Therefore, you wouldn’t need to take responsibility for the outcome if it isn’t positive. Whereas, with trading or investing, we believe the future is not completely random, and we have proven at Comhla, it is not. So we form a concept of future price i.e. based on previous experience of chart reading or hard knocks. This adds an element of responsibility, a desire to over analyze which allows us to outguess our method.
My own experience in trying to outguess my systems had led to some successes and some failures. The difference being that the failures caused a lot more stress than the small losses I took when my system told me to get out, so it’s just not worth it. Sometimes the forecasts we get from our trading method will have us trading in ways that are contrary to our reasoning and turn out to be right. Other times, you will agree with the method and it will be wrong. Bottom line is that it is better to have a robust method and follow it to the letter than it is to incur the stress of guesswork. By following a method flawlessly you can only pat yourself on the back. By deviating and getting it wrong, the pat turns into a big stick to beat yourself with! Don’t do it!