Trade What You See, Not What You Think
There's a cognitive bias that affects nearly every trader at some point: we form a hypothesis about what the market will do, and then we act on that hypothesis as if it were fact.
I've fallen into this trap more times than I'd like to admit, and it's consistently been one of my most expensive mistakes.
The core problem is straightforward: markets are complex adaptive systems. They don't follow scripts, and they're remarkably good at invalidating even well reasoned predictions.
The Psychology Behind Prediction Based Trading
When we trade based on what we think will happen, we're essentially doing two things:
- Overweighting our analytical abilities. We assume our read on the situation is correct, even though the market aggregates information from millions of participants with varying time horizons and motivations.
- Underweighting uncertainty. We treat a probabilistic outcome as a near certainty, which skews our risk management and position sizing.
This manifests in predictable ways: holding losing positions because we're convinced the reversal is coming, exiting winners prematurely because we've decided a pullback is imminent, or sitting on the sidelines waiting for a setup that never materializes.
What "Trading What You See" Looks Like in Practice
The alternative approach is more empirical. Instead of acting on predictions, you act on observable market behavior:
- Price action that has already occurred rather than price action you're anticipating
- Patterns that have completed rather than patterns you expect to form
- Confirmed breakouts or rejections rather than levels you think will hold or break
- Current volume and momentum readings rather than what you assume they'll do next
This doesn't mean you can't have a thesis. It means your thesis needs confirmation from the market before you commit capital.
A Useful Framework
Before entering any trade, it helps to separate two questions:
- What do I expect to happen here?
- What is the market actually showing me right now?
If your answer to #2 doesn't support your answer to #1, that's valuable information. It means the market hasn't validated your thesis yet, and waiting for that validation often saves you from unnecessary losses.
The Underlying Principle
Markets are information processing systems, and they often know things we don't. When we trade based on predictions, we're essentially saying "I know better than the collective market." Sometimes that's true. More often, it isn't.
Trading what you see is really just an exercise in intellectual humility. You're acknowledging that the market's behavior is the best available information about what's likely to happen next, and you're letting that guide your decisions rather than your own forecasts.
It's a small shift in thinking, but it's made a meaningful difference in my results.