Hindsight Bias
In hindsight it all looks so obvious, yet in real time it tends to be much harder, and as a new trader this tends to be most new trader’s Achilles heel. The new trader will look at a chart and say that they would have bought near the low of the overall move, held the whole way up and got out at the high. Yet you ask them what will happen next and their hands go up as they have no clue as to what's in store in the future.
Even for us as traders or analysts or whomever you listen to, most can predict shorter term moves pretty accurately. However long term predictions tend to be a dart at a dart board as there are too many variables to really say with confidence where a stock will be in 5 or 10 years time. Let's take a look at the chart below and see if you have the hindsight bug.
(Click on the chart for a bigger version)
Looking at Amazon from the past year how would you have traded it if you were able to buy just 1 share?
Where would you have bought?
Where would you have sold or would you still be in?
Now these questions in the real world are utterly useless hence why we don't want you to post them in the chat however for the lesson at hand, it is useful to show how shitty hindsight is.
You probably said something along the lines of “I would have bought near $1,000 and would have sold near $1500 or $1600 for a 50 to 60% return”.
That’s hindsight and useless in the real world. Now here’s the million dollar question. Let's repeat the same question based off the closing price today.
Where will Amazon be in 3 months?
Would you still buy 1 share now, if so what is your game plan?
See the difference between how easy it is to look at the past vs how hard it is to trade looking into the future. I will show you how we traded it recently.
It looks so small on the chart now however last March we bought Amazon through $860 and took it for a $140 ride to $1,000 on $10 of risk. We sold as the media outlets started to pump the $1,000 price target and we got out a few days before an $80 flash crash in the stock. It started to consolidate for the next 6 months as we were waiting to buy that $1,000 breakout (that we were selling 6 months earlier). Now remember we do not gamble on earnings, we bought the breakout however earnings were a few days later and we took a breakeven/papercut loss in it as it broke down below $1,000 going into earnings.
(Click on the chart for a bigger version)
Now at the time, Amazon was up almost 400% in the last few years, even we felt it had already gone so far, so we passed on buying it after the earnings beat and major gap up. When it took 3 months to make $140 points prior, Amazon gained $600 points in 6 months after already being on such a crazy run. This is why we focus on top right charts, because even if we fuck up the trade, the downside tends to be very small while the upside can be huge. Amazon went on a 60% run in 6 months after already going on what most thought was an already crazy move. However now I would not be so eager to rush back into Amazon as it will probably be at least a year before we see any real move above $1600.
Do you have balls?
In the Group Chat share your experiences with hindsight bias and if you have fallen victim to looking at what happened in the past and expecting your future trades to replicate how the stock had moved prior where you “could” have traded it perfectly.