How to overcome "Hindsight Bias"? | Forex Factory

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How to overcome "Hindsight Bias"?

  • #1
  • First Post: Mar 28, 2010 12:57am Mar 28, 2010 12:57am
I have continued facing the issue of hindsight bias. Let me elaborate a bit.

That is when I read a chart, I see a lot of profitable setups using my own method, but when I really trade it, it is a quite different story. Loss trade is much more than expected.

For traders who have experiences in overcoming this, please share with me.

.
  • #2
  • Mar 28, 2010 1:57am Mar 28, 2010 1:57am
same here,when i trade suddenly market changes situation,i feel like some body follows my trade:S
  • #3
  • Mar 28, 2010 3:04am Mar 28, 2010 3:04am
As a naked trader, the subtle difference in price action gives a completely different direction indication. The psychology barrier is huge at this point. I wonder how successful traders have overcomed this.
  • #4
  • Mar 28, 2010 3:13am Mar 28, 2010 3:13am
Looking at a chart with hindsight is always easier than trying to predict the next part of the chart so I guess it depends on how you devised and developed your system/strategy. Does your strategy actually work without hindsight, in a live market?

If you're sure it does, and assuming the market hasn't changed significantly, then that leaves the only other component, which is you!

There are lots of different ways to overcome the psychological hurdles in trading, but first you have to identify the problem before you can start looking for a fix. So which is it that's failing, strategy or the trader executing it?
  • #5
  • Mar 28, 2010 3:28am Mar 28, 2010 3:28am
Thanks pipmutt,

I am quite sure it works in actual trading. It works almost 100% in hindsight chart reading. The performance drops significantly in actual trading, but it is still profitable in actual trading.

The thing is my trading style is highly discretionary based on a number of different factors, I rate whether a setup is highly-likely, very-likely, or not likely to be successful. There is no straight rules to judge the relative importance of these factors.

I feel in hindsight chart reading, my discretion tend to justify what has happened. In actual trading, I am confused.

kk

Quoting pipmutt
Looking at a chart with hindsight is always easier than trying to predict the next part of the chart so I guess it depends on how you devised and developed your system/strategy. Does your strategy actually work without hindsight, in a live market?

If you're sure it does, and assuming the market hasn't changed significantly, then that leaves the only other component, which is you!

There are lots of different ways to overcome the psychological hurdles in trading, but first you have to identify the problem before you can start looking for...
  • #6
  • Mar 28, 2010 3:49am Mar 28, 2010 3:49am
Quoting kk007
Thanks pipmutt,

I am quite sure it works in actual trading. It works almost 100% in hindsight chart reading. The performance drops significantly in actual trading, but it is still profitable in actual trading.

The thing is my trading style is highly discretionary based on a number of different factors, I rate whether a setup is highly-likely, very-likely, or not likely to be successful. There is no straight rules to judge the relative importance of these factors.

I feel in hindsight chart reading, my discretion tend to justify what has...
That's one of the pitfalls of a discretionary system, looking at a chart in hindsight it's difficult to be totally honest with oneself, it's nice to believe we would have made the right discretionary decision but then we're biased.

Have you thought about using one of the market replay tools to simulate a live market as opposed to just looking at a chart in hindsight? As long as you don't cheat it should give you a reasonably accurate picture of how your system would be likely to perform live.

You can see what I'm getting at here, if you can make sure the strategy itself works first then it's going to be easier to narrow down the reason for failure or poor live performance.
  • #7
  • Mar 28, 2010 3:56am Mar 28, 2010 3:56am
Quoting kk007
I have continued facing the issue of hindsight bias. Let me elaborate a bit.

That is when I read a chart, I see a lot of profitable setups using my own method, but when I really trade it, it is a quite different story. Loss trade is much more than expected.

For traders who have experiences in overcoming this, please share with me.

.
If you are using indicators it is hardly surprising since they only work looking back on the chart but they fail when looking forward. In other words indicators do a marvellous job on the left hand side of price on your live chart but fail miserably on the right hand side.
  • #8
  • Mar 28, 2010 4:48am Mar 28, 2010 4:48am
One of the problems with discretionary trading is that we tend to make it more complex than we believe it is. As soon as too many factors are involved, then problems set in. In particular, the problem of not taking trades because of doubt. That doubt doesn't exist when looking back, but it sure as hell does when looking forward.

You need to streamline the discretionary process by using binary decisions a much as possible. An example would be something like, "Price is above the daily open, can I sell here? No, I only sell when it's below the open."

Quoting kk007
Thanks pipmutt,

I am quite sure it works in actual trading. It works almost 100% in hindsight chart reading. The performance drops significantly in actual trading, but it is still profitable in actual trading.

The thing is my trading style is highly discretionary based on a number of different factors, I rate whether a setup is highly-likely, very-likely, or not likely to be successful. There is no straight rules to judge the relative importance of these factors.

I feel in hindsight chart reading, my discretion tend to justify what has happened....
  • #9
  • Mar 28, 2010 4:54am Mar 28, 2010 4:54am
Thanks Dopey,

How are you? Hope you are well!

I tend to look at more than one factor (mostly 2 to 3) when making decision, because of the "synergistic" effect. If one factor gives indication of 60% success, combining two factors gives indication of 84% success( 1-(1-60%)*(1-60%)). I really want to use one factor alone, since it is simpler, but I am not aware of any simple-and-high-prob trading method.

cheers,

kk


Quoting Dopey
One of the problems with discretionary trading is that we tend to make it more complex than we believe it is. As soon as too many factors are involved, then problems set in. In particular, the problem of not taking trades because of doubt. That doubt doesn't exist when looking back, but it sure as hell does when looking forward.

You need to streamline the discretionary process by using binary decisions a much as possible. An example would be something like, "Price is above the daily open, can I sell here? No, I only sell when it's below the...
  • #10
  • Mar 28, 2010 4:56am Mar 28, 2010 4:56am
Quoting PipStar
If you are using indicators it is hardly surprising since they only work looking back on the chart but they fail when looking forward. In other words indicators do a marvellous job on the left hand side of price on your live chart but fail miserably on the right hand side.
I am naked trading. That is indicator-free. But I am still facing this problem. I think the problem is more series with discretion trading.
  • #11
  • Mar 28, 2010 5:12am Mar 28, 2010 5:12am
Quoting Dopey
You need to streamline the discretionary process by using binary decisions a much as possible.
I once has an idealized principle that given a chart situation, I can only give one unique response. Nevertheless, in practise I have to compromise.

Even when I judge a head-and-shoulder pattern, I have to say whether it is 80% alike or 70% alike rather than yes or no, I am not very successful in using binary method.
  • #12
  • Mar 28, 2010 6:04am Mar 28, 2010 6:04am
I use an EA for my trading and it proved succesfully. Anytime I try to trade the same system discretionary I'm doing worse.
If discretionary trading would be profitable, 5% would lose money and 95% would win. According to Ian Ayres and his theory, humans tend the make worse decision than a computer whenever they are confronted with probabilities.
Therefore there's no surprise for me that you're profitable using old data and you seem to sell bottoms and buy tops in real trading.
  • #13
  • Mar 28, 2010 6:08am Mar 28, 2010 6:08am
I haven't met an EA meeting my requirement.

Quoting Sauron
I use an EA for my trading and it proved succesfully. Anytime I try to trade the same system discretionary I'm doing worse.
If discretionary trading would be profitable, 5% would lose money and 95% would win. According to Ian Ayres and his theory, humans tend the make worse decision than a computer whenever they are confronted with probabilities.
Therefore there's no surprise for me that you're profitable using old data and you seem to sell bottoms and buy tops in real trading.
  • #14
  • Mar 28, 2010 6:15am Mar 28, 2010 6:15am
And your requirement is...?
  • #15
  • Edited 6:31am Mar 28, 2010 6:16am | Edited 6:31am
Quoting kk007
I once has an idealized principle that given a chart situation, I can only give one unique response. Nevertheless, in practise I have to compromise.

Even when I judge a head-and-shoulder pattern, I have to say whether it is 80% alike or 70% alike rather than yes or no, I am not very successful in using binary method.

Why? Scared of losing money and therefore second guessing yourself? Or are you just one of those 'glass half empty' pessimists?
  • #16
  • Mar 28, 2010 6:27am Mar 28, 2010 6:27am
Quoting pipmutt
Why? Scared of losing money and therefore second guessing yourself?
No, nothing to do with money for this. Whether a pattern looks like a Head-and-shoulder or not, usually there is no a 100% yes or 100% no answer.
  • #17
  • Mar 28, 2010 6:33am Mar 28, 2010 6:33am
Quoting kk007
No, nothing to do with money for this. Whether a pattern looks like a Head-and-shoulder or not, usually there is no a 100% yes or 100% no answer.
Sorry, I don't get what your problem is then.
  • #18
  • Mar 28, 2010 6:38am Mar 28, 2010 6:38am
Quoting pipmutt
Sorry, I don't get what your problem is then.
Thanks. Perhaps, I got illusion of success to certain extent. During historical chart reading, I can see the result of a setup. I justify my judgement based on the result rather than having the full ability of predicting.
  • #19
  • Mar 28, 2010 8:42am Mar 28, 2010 8:42am
First, if your system is largely (or entirely) discretionary, then backtesting loses much of its already-dubious value. This is why forward testing is critical. I personally think that one month of forward testing is worth more than a year of backtested results.

Second, if you really want to backtest a discretionary system, you must do everything you can to blind yourself to the full chart. If you're using MT4, go to a chart that you're reasonably unfamiliar with and then go back in time as far as you can, so you presumably have no internal knowledge about where the pair is going. Then make deliberate use of the F12 key. The F12 key will step you through the chart one bar (or candlestick) at a time. Do NOT hit the F12 key until you have made your trading decision (or non-decision) based upon the current bar.

This will allow you, to some extent, to "experience" the market as you would have experienced it in real time had you been trading it at that time.
  • #20
  • Mar 28, 2010 8:58am Mar 28, 2010 8:58am
Quoting kk007
Thanks. Perhaps, I got illusion of success to certain extent. During historical chart reading, I can see the result of a setup. I justify my judgement based on the result rather than having the full ability of predicting.
So basically your system only works on historical charts and can't be put to practical use in a live market environment, is that what you're saying?

Not being funny but more or less every strategy works with the benefit of hindsight, especially discretionary ones!
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