Traders are majority of times trapped in the 'hindsight bias', which is the tendency to believe after learning the outcome, that he could have foreseen it. This is one of the biggest decision traps & it matters because it gets in the way of learning from our experiences.(1/6)
The problem starts when a trader thinks he 'knew it all' & so he actually stops finding reasons why the strategy worked in the first place. He would specifically review data that affirms what he knew to be valid & will attempt to make a strategy around it. (2/6)
The result would be complecency that would later show in his trading results. It would make the trader overconfident in the certainty of an outcome & will view his judgements as something which is ultimately bound to happen. A very simple example is watching a thriller movie(3/6)
Only after the killer is revealed & we recall the sequence of events again, we remove the initial impressions about the killer & see with clarity how it all happened. So at the end we walk away from the movie thinking we knew it all along, while the reality is we didn't. (4/6)
With improvement in backtesting tools this bias has increased as well. Backtesting is an art. Majority of times there is difference in what is backtested & what we face in live trading. Also backtesting will only simulate what has happened, not what can happen. (5/6)
Hindsight bias is a big psychological issue that prevents traders from looking at the market objectively. Know that in trading the correct decision isn’t determined by the result of few trades. So be mindful of this bias & don't stop your learning. (6/6)