Hindsight Bias

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Joined: December 28, 2012SingaporeWas this article helpful?001ByJoseph CK Chua

Expert Author Joseph CK Chua

is often known as the "I know it all along" effect which is a tendency of viewing events as being more predictable that they practically are. This phenomenon is often caused by the occurrences of a past event that cause one to think that he can accurately predict another. Psychologists attribute to our innate need to find order in the world by creating explanations that allow us to believe that events are predictable. This behavior is further precipitated by the fact that the real outcomes are more comprehended and readily grasped by people's minds than the infinite array of outcomes that could have but didn't materialize. As such, this construction of improper links between the cause and effect of an event may result in incorrect oversimplifications and lead people to overestimate the accuracy of their own predictions.

While our inclination to believe that we "knew it all along" is often harmless daily life, it can become a very dangerous trap in the Forex market. This is because this bias provides traders with a false sense of security when making trading decisions. This can manifest itself in excessive risk-taking behavior and place a trader's portfolios at risk. Besides this, matters also because it can get in the way of a trader learning from his experience. This is because tends to lead people to perceive their performance to be better than it actually it, after learning the realization. "If you feel like you knew it all along, it means you won't stop to examine why something really happened." Research also shows that clouds people's previous conceptions of what those events are, causing them to forget how ignorant they were before observing the outcomes and answers. As such, may lead traders to underestimate the uncertainty and volatility of the Forex market, which again results in inefficient trading decision and poor risk management.

Essentially, people with find it difficult to reconstruct an unbiased state of mind, simply because it leads people to exaggerate the quality of their foresight. In order to overcome , it is therefore necessary, for the trader to understand and admit their susceptibility. One way to face the facts is to keep a trading journal, and use it to record your analysis and reasons for every trade, as well as the thought-process and emotional swings that went with the trade. This will be useful when you look back to the past after the event, and will prevent any disillusioned thinking.

Find out more about trading psychology and learn how forex trading success can be more about your mindset and less about the markets.