A curious fact of trading is that you can take two different traders and give them the exact same chart and even the same trading pattern, and you will end up with very different results. With everything else being equal like knowledge, trading experience and access to information, why do two different traders behave so differently when they are looking at the exact same market data?
I started thinking about this when my friend and I had been discussing a chart of a market we both had open trades on. At that time the market was moving against both of us quite severely and it struck me as odd that we had very different views even though we had the same trade on and the same thing was happening. I had concluded it was probably due to the fact one of us had a much larger position than the other, and one of us was clearly far less attached to the trade/chart because they had much less to lose and less skin in the game.
This is of course just one of the possible reasons we saw this trade and the chart of this market very differently; in fact, there is a plethora of reasons we could have both reached different conclusions and I wanted to write a lesson and bring these factors into the spotlight. You may read these points and start nodding your head and have one of those “aha” moments, and hopefully this gets you thinking more about the fact that multiple perspectives can exist at the same time in the market, i.e., yours and your opponents (those on the other side of your trade). Thinking about these different perspectives and WHY they might exist will only work to make you a better trader.
It is my belief that the more money a trader risks on a trade relative to their overall net worth, the more emotionally invested in that trade they will be. It seems like commonsense perhaps, but the implications of this are quite profound…
When you become over-committed to a trade or to an investment, you are FAR more likely to make a mistake. For this reason, two traders can literally be in the exact same trade, but if one has risked a much higher percentage of their net worth, they are most likely going to see the chart much differently and react to it much differently, than the trader who has risked a ‘safer’ amount.
The take-away point of this, is that the more money you have at risk, the more emotionally-charged you will be at every up and down tick of that chart. When you are very emotional about a position (usually due to being over-committed, money-wise) you are more likely to see a short-term reversal in that position as an impending market correct that may go well past your entry point, causing you to lose money. So, what do you do? Inevitably, when faced with this powerful emotion of FEAR, you will exit that trade for probably either a very small gain relative to what you had (since you’re exiting as the market is coming back towards your entry) or you will exit near breakeven. Granted, this is still much better than a loss, but it can be very painful and mess with your trading mindset, leading to more mistakes.
To the trader who wasn’t over-committed, that same correction may have been viewed differently; as a simple market correction. That trader may have held the trade and now is well into the money as the chart turned around just as the previous trader bailed.
This is really just one of many examples of how risking too much or being over-committed to a position can cause you to panic and self-sabotage your trades.
To reiterate my point; two traders, one has risked way too much, the other has risked a much smaller amount, the one who risks too much will almost always panic and mess up the trade, the one who didn’t risk too much is more likely to have a favorable trading result.
Bias of no position or position
Simply by being in a position, by having ‘skin in the game’ so to speak, you may view the chart differently than a trader who has not taken a position in that market. Even if you are staying within your per-trade risk parameters and following your trading plan to the T, you are going to be at least slightly influenced by the fact that you have your hard-earned money on the line and could potentially lose it. This is essentially why trading is not easy and it’s not for the weak minded or easily shaken personality.
It’s a curious fact that when you are demo-trading with paper-money, you are probably going to get better results than when you trade live. The reason is, it’s paper-money, not real money. The key to trading success truly is trying to forget about the money and trading the markets as if it’s all a game and the money is just a way of keeping score, a tally of points, so to speak. The only way to effectively do this is to NOT be over-committed. You have to basically try to see the chart as if you have no position in the market, even if you do.
Recency bias based on trade outcomes
Two traders, trading the same setup on the same chart may see that chart differently due to something called recency bias. Recency bias means you have a bias or an opinion / feeling about something due to an experience you had recently with that same or similar thing. So, trader A may have seen this ‘same’ scenario before and had a trade on and lost money, whereas trader B may have made money on market conditions similar to what they’re seeing now.
As stated in an article in USnews & World Report titled 7 Behavioral Biases that May Hurt Your Investments:
It’s no secret that retail investors tend to chase investment performance, often piling into an asset class just as it is peaking and about to reverse lower. Because the investment has been climbing higher recently, investors believe that will remain the case.
As humans, we are all influenced by recent events more heavily than past ones, it’s just part of being human. This can be good and bad in trading. Market conditions that are trending strongly lend to recency bias being beneficial; because if you keep getting in the trend on pullbacks you’ll likely keep making money. However, when the trend changes and the market starts moving sideways, you are likely going to get chopped up if you don’t quickly read the price action and figure out the conditions are changing.
Interestingly, there are many different personality biases that can affect how any individual sees the market.
Too attached to the market or to the initial view
People can become emotionally attached to charts / certain markets or just to their initial view on a chart for a variety of reasons, not only from being over-committed financially.
Take a trader who has researched a certain market extensively and studied the chart a lot, they are probably going to become very attached to a view once they take one. They will feel their time spent studying XYZ market has to have been worth something and they can’t bear to think the market isn’t doing what they want. This causes them to look for news articles and web stories that support their view on the chart (after all, you can find any opinion on anything online). This is essentially letting arrogance and ego dictate your trading behavior. You can become over-attached to a chart simply because you don’t want to believe you are wrong or that all your research has been for naught.
This is essentially what is called the over-confidence bias. This is caused by spending too much time studying a market and ‘convincing’ yourself you are right about what will happen next. Traders also get over-confident after a winning trade because they tend to become overly-optimistic about their recent decision and attribute too much of the win to something they did rather than just a statistical occurrence of their edge playing out.
To learn more about different behavior biases, check out this article from internationalbanker.com: Why Biases Lead to Irrational Investment Decisions, and How to Fight Back
Another trader who maybe doesn’t have this mental hurdle because they haven’t done the research and the study is arguably at an advantage to the trader above. When you spend less time on something you are naturally more neutral and less committed to it. This gives a fresh perspective and more importantly, a more objective one.
In trading, objectivity is key and this is why I am generally against trading the news or paying too close attention to fundamental data. Beyond learning to trade price action and understanding basic trading terminology, there is no real advantage to increasing amounts of market research, in fact, it may actually hurt you because of what we have just discussed.
Indicators vs. clean charts
One obvious reason two traders will view the same chart differently is indicators. Some traders like to plaster their charts in technical analysis indicators that literally make the charts look like a piece of modern abstract art.
The trader who uses clean, simple price action charts without indicators plastered all over them, will inevitably have a different perspective on the same market; a clearer and more accurate one.
Trend follower vs contrarian
Similar to the above point, there is truth that two traders who have historically made money trading the markets different ways, are going to see the same chart differently. For example…
Trader A may see a chart going up, but because he is a natural contrarian (wants to trade opposite to near-term momentum) he wants to short into the strength, ideally at a key level, because he has made money doing this before (recency bias). He hates trading with the herd.
Trader B may see that same chart going up and he is looking to go long! Because he too has made money doing this. He has traded trends and made good money. He can’t ever seem to go against the herd.
Neither approach is necessarily right or wrong; there are multiple ways to skin a fish, so to speak. Whilst it is more dangerous to trade against near-term trends, some traders just have a knack at fading the market, or picking the places the market will reverse (contrarians). However, for most traders, sticking with the trend is the best bet.
The point is that each person is going to see the exact same chart, setup or pattern in the market a little bit differently and for a variety of reasons discussed above, react differently to the same market movement.
Two traders can indeed see the same chart differently and more often than not they will get different results from the exact same trading setup on the exact same chart. The common unifier in trading is the price action on the chart, it really is the great equalizer. The price action takes into account ALL variables affecting a market and that have affected it in the past and displays it to you in a relatively easy to read clue-packed ‘portrait’. Learning to read the price action is how you can eliminate or greatly reduce most of the variables in the markets that confuse and complicate the trading process for most.
Most of the reason two traders see the same chart differently is due to lack of discipline. Some traders chronically risk too much per trade, which obviously greatly influences their perception of what a market is doing and what it might do next. Whilst I can teach you the importance of discipline and explain to you why you need it, I cannot force you to actually get and stay disciplined in your day-to-day trading routine. I can show you the door to trading success via my trading courses and I can lead you to the proper path, but I cannot make the journey for you, that is up to you. So, what you have to decide next is how are you going to view the same charts everyone else is looking at? Will you view them through emotionally-charged eyes and indicator-riddled screens, or will you view them through calm, collected eyes with smooth, clean charts? That is also up to you…
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