“It ain’t what you know that gets you in trouble.– Mark Twain (who was totally not a trader)
It’s what you know for sure, that just ain’t so.”
This is one of the biggest areas of danger for traders, and it’s not at all exclusive to beginners, either. In fact it might be an even larger problem with more seasoned traders.
In trading we live with uncertainty. It’s our daily reality! But the longer we do something in the markets that “works”, the easier it is to fall into the trap that it works because “we know what’s going to happen”. And this can lead us into very dangerous territory.
The fact is we never actually know what’s going to happen in the markets. No matter how much statistical analysis or backtesting we do, we don’t know. We may believe, we may hope, we may expect. We may even have very good reasons for doing all those things, grounded in reason, math, science, pattern recognition, etc. But we still don’t know
Where traders get into trouble is failing to acknowledge and accept that they can be wrong. That really anything can happen at any time and there is no way to actually know ahead of time that it’s going to happen. Even knowing an earnings announcement, crop report, or other “news” item ahead of time wouldn’t guarantee the outcome you “know” has to happen. Markets are funny this way because people are funny this way and markets are composed of people doing stuff. How many times have you seen “good news” send prices falling, or “bad news” send prices soaring? But even that isn’t consistent.
This extends of course to charts and various forms of technical analysis. It’s easy to look at years’ worth of historical occurrences and convince yourself that something has to happen again in the future when X happens, because it happened in the past. But there’s a good reason why the statement “past performance is not indicative of future results” is worked into every single advertisement for trading platforms. It’s because it’s true! The past simply does not indicate the future. It certainly informs the future, but nothing ever has to happen now just because it did before. The sad truth is that there is no crystal ball or black box that will tell you what people are going to do.
So I urge you as a trader to pay attention when you think you “know” something is going to happen. Perhaps in that moment ask yourself a simple question:
“And if it doesn’t? What then?”
I think having the answer to that in front of mind, could potentially save your account one day.
Until next time, trade well!
Jonathan van Clute
Community Manager, Trading Research Group