Something that’s hard for traders to understand is the concept that all moments in the Market are independent from each other; each moment in time is unique in the manner that the Market processes it. We humans are different, however; we tend to create Pavlovian responses to specific “trigger” events through learned behavior.
For example, when we’re young we figure out very quickly which things bring us pleasure, and which experiences bring us pain. A bag of Halloween candy will put a smile on our face, but picking up the cat and turning it upside down might get us clawed for our mischief. As we experience life, we catalog and inventory these experiences, which we eventually call “wisdom.”
But then we start to tangle with the Market and we expect the same predictable response from stimuli and patterns. We note certain responses from the market to inputs, and we mentally catalog those responses as well. Pretty soon you’ve got it all figured out!
“I know that when I see the price test the lower edge of the Opening Range from below, it will always reject that level!” or “Every time I see the stochastic cross to the upside, it’s a great buy!”
We then entangle these beliefs with what’s called “recency bias” where we tend to give more weight to recent experiences over the span of time. Let me give you an example from this week that will help you understand how to pull all of these concepts together:
A little while back on a Monday we had a pretty nice “range” day; the price stayed in a relatively tight range all day. That led to a nice Zero DTE Iron Butterfly trade. On Tuesday, the same pattern showed up for a “range trade” entry, same as Monday…and within ten minutes I had to close the trade for a loss. Something shifted in the sentiment and the “range” day became a “trend” day to the downside.
Most new retail traders would immediately abandon that setup, not because it worked on Monday, but specifically because it DID NOT work on Tuesday. This is Recency Bias in action. They will sit on their hands for the next five good setups just because it failed that one time.
Would you care to guess what will likely happen when they finally gather the courage to enter again on the next setup? More than likely it will fail on them again. This is the classic symptom of “trading NOT to lose” instead of “trading to win.”
Learn to accept the fact that every moment in the Market is unique. By doing so, you can start to wean yourself off of the human need to apply recency bias to what you believe “should” happen.
In your corner….Doc Severson
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