BarroMetrics Views: Trading Our Beliefs

When I first started trading I confused ‘reality’ with my ‘perception of reality’. As a result, I fell into the ‘certainty’ and ‘hindsight bias’ traps.

The best way to explain this insight is by way of example. Figures 1 and 2 show the EURUSD and S&P with yesterday’s price action between 9:30 EST to 16:00 EST marked by the rectangle.  With minor variations, both patterns are the same. But in the EURUSD, I saw it as an opportunity to add to my shorts whereas in the S&P, I first saw the price action as requiring exit of shorts and reversing; and then at 16:00 EST, exiting the longs.

Since both patterns are the same, why the difference?

The answer is found in the meaning my belief system gave the structures coming into last night’s trading.

In the EURUSD, my beliefs said that as long as we did not see a print at or above 1.3705, then we were forming a bearish continuation pattern I call a ‘6-legged Running Correction’; whereas in the S&P, my beliefs said that for the bear scenario to hold we should not see acceptance above 1101. Since we did and since we saw early strength, I took the view we’d see at least a 20-point range to the upside by day’s end. Since the early strength high held (10-point range), I exited the longs. There was nothing in the structure to suggest I should reinstate the shorts.

But notice that in each case, it is my beliefs providing a structure to the price action that forms the basis for my trades. It’s the ‘out there as seen by the in here’.  As such, at any juncture, my belief structure may prove to be wrong. Thus the need for an exit strategy like price and time stops. And thus the reality that there will be times when I will exit, and then have the market move in the direction I originally thought that it would.

When I was a newbie, I failed to appreciate the importance of this observation. As a result, I used to get really down on myself when I’d exit a trade only then to have it go my way without me being aboard. Nowadays I accept this event as being part of the price for trading success; like taking profits, missing the trade in this way is a price we pay for participating in the markets.

FIGURE 1 S&P

FIGURE 2 EURUSD

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