Expectations and the big picture
A good trade can lose money
Judging a decision by its result is one of the costliest habits in trading. It has a name, and a simple grid that fixes it.
Decision researchers call it outcome bias: rating a decision by how it turned out instead of by the quality of the thinking behind it. Poker players call it being results-oriented. In trading it quietly teaches the wrong lessons, because the market rewards bad decisions often enough to reinforce them.
The four boxes
| Made money | Lost money | |
|---|---|---|
| Followed the process | Good trade. Log it, nothing more. | Good trade. A cost of doing business. |
| Broke the process | Bad trade. The most dangerous box. | Bad trade. Painful but honest. |
Most people only learn from the bottom-right box. The professional eye goes to the bottom-left: the oversized trade that worked, the moved stop that came back, the revenge entry that paid. These feel like wins. In reality you've just paid yourself to repeat a mistake, and sooner or later the same behavior meets a market that doesn't come back.
The opposite error
The top-right box causes damage too. A valid setup that hits its stop looks like failure, so traders adjust. They widen stops, add filters, abandon the strategy after three losses. They're "fixing" something that wasn't broken and destroying a real edge in the process.
How to apply it
- Tag every trade. Yes or no: did it follow the plan? Do this before you look at the result, if you can.
- Keep separate totals. Add up your in-plan trades and out-of-plan trades. Many traders find that the two groups perform very differently.
- Review bottom-left first. Each week, go through the rule-breaking trades that made money. Ask what would have happened if they hadn't worked.
- Don't change rules after one loss. Change them after a large sample, at your scheduled review.
- Baron and Hershey, "Outcome Bias in Decision Evaluation," Journal of Personality and Social Psychology, 1988.