Anyone who has been day trading for any length of time will have had this experience.
You watch a market for a while, and you see a nice steady uptrend lasting maybe twenty minutes or more depending on your trading timescales.
So you jump on the trend, maybe on a small pullback, and instantly the market goes against you, often to the galling extent that you have picked the exact top of the trend. If you are a real newbie, you may even suspect skulduggery by the broker to snatch your few pounds of investment. You duck out some time later with a loss, feeling very unlucky indeed. But are you?
For me, this is a variation of the gambler’s fallacy. Simply put, if a roughly even chance (say red on a roulette wheel) comes up ten times in a row, it seems to the uninitiated as if black is due any time now, and so is a good bet for the next spin. However, a moment’s thought would reveal that the wheel has no memory of past numbers, so it is just as likely to come up red again as to come up black on the next spin.
The trading situation is the reverse of this, but a similar principle. The trade has been in an uptrend for a while, so you expect it to continue. But there is no reason why it should really. Of course there is a lot of theory saying that a market is more likely to continue doing what it is doing rather than change, and this is what trend following relies upon, and over time it seems to work given good money management. But even if it was 60/40 that it would continue on the next tick, it might very well soon reverse anyway, and it really wouldn’t be as unlucky as it seems when you look at the chart.
I know most of you will know this already, but for those newbies out there, be aware that trading looks simple when you see a chart at the end of the day. All you have to do is jump early on a trend and follow it until it breaks down, and then jump out with a nice easy profit. Unfortunately, at any point on that trend, there was still a substantial chance that it would reverse at any moment leaving you with a loss. For the statisticians out there, it is the difference between looking at data a priori or a posteriori.
I am currently about breaking even as a day trader investing trivial amounts of money. This probably puts me marginally ahead of the average trader. But it has been a long hard road even getting this far. Good luck to all, just don’t bet the farm until you know what you are doing (and probably not even then).
You watch a market for a while, and you see a nice steady uptrend lasting maybe twenty minutes or more depending on your trading timescales.
So you jump on the trend, maybe on a small pullback, and instantly the market goes against you, often to the galling extent that you have picked the exact top of the trend. If you are a real newbie, you may even suspect skulduggery by the broker to snatch your few pounds of investment. You duck out some time later with a loss, feeling very unlucky indeed. But are you?
For me, this is a variation of the gambler’s fallacy. Simply put, if a roughly even chance (say red on a roulette wheel) comes up ten times in a row, it seems to the uninitiated as if black is due any time now, and so is a good bet for the next spin. However, a moment’s thought would reveal that the wheel has no memory of past numbers, so it is just as likely to come up red again as to come up black on the next spin.
The trading situation is the reverse of this, but a similar principle. The trade has been in an uptrend for a while, so you expect it to continue. But there is no reason why it should really. Of course there is a lot of theory saying that a market is more likely to continue doing what it is doing rather than change, and this is what trend following relies upon, and over time it seems to work given good money management. But even if it was 60/40 that it would continue on the next tick, it might very well soon reverse anyway, and it really wouldn’t be as unlucky as it seems when you look at the chart.
I know most of you will know this already, but for those newbies out there, be aware that trading looks simple when you see a chart at the end of the day. All you have to do is jump early on a trend and follow it until it breaks down, and then jump out with a nice easy profit. Unfortunately, at any point on that trend, there was still a substantial chance that it would reverse at any moment leaving you with a loss. For the statisticians out there, it is the difference between looking at data a priori or a posteriori.
I am currently about breaking even as a day trader investing trivial amounts of money. This probably puts me marginally ahead of the average trader. But it has been a long hard road even getting this far. Good luck to all, just don’t bet the farm until you know what you are doing (and probably not even then).
