A couple of different things came together to motivate this particular post. One of them is a post on the Pys-Fi blog from a few years ago I recently revisited. It’s on the subject of our memory, both in general terms and specifically with respect to our involvement in the financial markets. The driving thrust of that pieces is that we cannot and should not always trust our memories.
That’s right. Your memory is not nearly as solid as you might like to think. It’s subject to external manipulation and also your own internal issues like hindsight bias.
That article, in turn, reminded me of a resent EconTalk podcast episode on the subject of forecasting. In it, guest Philip Tetlock talked about reviewing the forecasts of a group of people who had been put through an experimental process. The subjects were asked to recall their prior forecasts and the degree of accuracy they exhibited. Tetlock found that the forecasters often were not nearly as accurate as they thought they’d been.
Can you see how this might be an issue in your trading?
If you can’t rely on your memory of your past performance making market calls, how much faith can your have in the methodology you are using? Not much, I’d say.
So might think that a way to avoid this sort of problem is to trade entirely mechanically. Maybe not, though.
In the final analysis, your faith in any system or approach is going to be reliant on your recollection of it’s performance. Selective memory could see you exaggerate the system when things are going well – perhaps leading to over-trading. Similarly, it could lead to not taking trades during draw down periods. Neither is an optimal outcome.
In the post Being a reflective trader from the other day I talked about the idea of reviewing your trading periodically. This is something which might help. Regularly looking back over prior trades will tend to help keep a realistic record of your performance – or your system’s performance – in your memory banks for future recall.
Something to consider if you’ve hesitated in keeping a trading journal.