BarroMetrics Views: The Learning Process II

So how does this insight - that the brain is uncomfortable with information that does not fit a pattern we already hold - apply to trading?

I’d suggest in a great many ways:

One way is found in the insight that ‘we see what we expect to see’. This is even stronger than the finding that ‘we see what we want to see’. ‘Seeing what we expect’ explains why some events are foreseeable by some while the same events are considered black swan events by most others e.g. the Sub-prime. In the same category, I’d place the inevitability of (at least) a world-wide double dip recession.

Another way is the refusal to take in new evidence - once we are in a position.

Figure 1 shows a recent trade in the 30-year bonds. I took the trade as shown when the market provided a bearish conviction bar at my resistance zone. Since I saw the trend as down, the price action constituted a valid zone, setup, and entry. My stop was above 121.  Five days later the market had a strong day up.

In my experience if my pattern was valid we should not have seen this type of price action. For this reason I exited day after the strong day up. The market still has to validate my decision. What if the market tumbles now? I just get back in.

The point is that I made a decision based on my view of the evidence that the market was heading South. That decision needed to be revised in the light of fresh evidence that the market provided five days after entry. The fact that I was in a position did  not alter what the market’s message is. So, that left  me with a choice: exit on the new evidence or  wait for my stop to be hit?

Under these circumstances I tend to choose the former.

FIGURE 1 30-Year Bonds

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