Good Day Rookie Bloggers! Today I want to discuss a common issue that most traders, whether they be seasoned or brand new, tend to get hung up on. The issue I am referring to is the lookback and wish tendency. This could apptly named the “coulda would shoulda” trade. If you have just read this and chuckled then you are definitely in the right place.

Let me paint a picture and ask yourself if you have found yourself thinking this way on occasion or perhaps quite often. Let’s say you have found some success with a particular strategy, maybe its a credit spread or a maybe it’s just something simple as trading stock. You have been placing these trades over and over again and winning on the vast majority of the trades, however, there is a but, there is always a but right? You see that the profits you are making are maybe not as much as you could have made had you used a different type of strategy and this causes you distress. This is a very normal and human thing to have happen. If you are a regular person you have most likely experienced this at some point in your life. It may not have been in trading but we all sometimes wish we had done things differently, especially when it would have brought us more joy or reward. This week I am going to expose why this is a bad idea to give in to this feeling and why it could be best to stick to what you know.

Take a look at the chart below.

This is a chart of MCD. We have a cup and handle breakout setup that looks promising, right? When we see something like this chart the trader in us starts to salivate like Pavlov’s dog. We have seen this pattern before and we know that many times this pattern will produce a bullish uptrend breakout in which we can take advantage of. So the question that comes to mind is “how do I play this?” Do I use a long call or maybe a bull call? I could do a credit spread and even if it didn’t break out as I expected I could still win, right? What about a diagonal spread, I could gain from both a breakout and time if it is managed right? You see there are many choices but which one is the right one? Also, is there a wrong one? If you look at the next chart you will easily be able to pick the right strategy or one of the right strategies but you would be arm-chair quarterbacking the trade and that doesn’t help with the next trade.

From this chart you can see that MCD took off and that any of the trades I mentioned would have made money but if you understand those trade types you would know that some would make you more money than the other ones. This is where the fight starts…within ourselves. We start second guessing our decisions because we now have more information to go on. There are a few reasons why it is bad to start to second guess our trading decisions.

First, we don’t know where the stock will go and how fast it will get there until after the trade is over so if we only take this example and use this information the next time we trade then perhaps the next trade doesn’t do what this one did, I think you can see how this recency bias can hurt us in the long run.

Secondly, what if we are not familiar or experienced with these other types of trades and we don’t manage them well and we mess up the trade or at the very least we do extract all the profit we think we should have had and then go through the coulda, woulda, shoulda process all over again?

Finally, is the psychological toll that going through this process has on us. If we are constantly beating ourselves up when we have losing trades and then also beating ourselves up when we have winning trades but we didnt win like we thought we should of then we are going to be very beat up and not in a good place to trade well in the future.

So, what do we do about this problem? Well, I take the advice of one of my great mentors he said…..as soon as the trade is over its over, there are too many other great trades waiting for us to arrive and that we don’t have time to dwell on the ones that are done!

So if you make money pat yourself on the back, if you lose money and learn something pat yourself on the back. The more pats on the back you get the better trader you will become and then you will be poised to make the big profits next time!

Trade Well,

Coach “Old Money” Holmes