When day trading, recent trade results can significantly influence your next decision.
I won big yesterday.
I feel like I can win today, too.
Conversely, I lost big yesterday.
I am afraid to enter a trade today.
However, winning yesterday and whether you can win in today’s market are two different things.
Just because you lost yesterday does not mean you will lose today.
Even so, people sometimes place more importance than necessary on recent events that are easy to recall.
The “availability heuristic” is related to this type of psychology.
In this article, I will explain how the availability heuristic affects day trading decisions and what you should keep in mind to avoid being swayed by recent wins and losses.
What is the availability heuristic?
The availability heuristic is a psychological tendency to make judgments by prioritizing information that is easy to recall.
In particular, recent experiences and events that left a strong impression are more likely to remain in your mind.
This is very easy to understand when thinking about day trading.
I won 50,000 yen yesterday.
I lost 50,000 yen yesterday.
I have won three days in a row.
I lost twice in a row on the same stock.
These experiences remain strongly in your memory.
As a result, even though you should be making decisions based on the current market, your recent experiences start to creep into your next trade.
It is easy to feel that “I can win today too” after a winning streak.
For example, suppose you have made a profit for three consecutive days.
Then,
“I’ve been doing really well lately”
“I feel like I can do it today too”
“It should be fine to be a bit aggressive”
You might start to get feelings like these.
However, winning for three days is not a basis for your trade today being successful.
Until yesterday, the Nikkei Stock Average may have had a clear direction, and the market may have been very compatible with your strategy.
However, today, the Nikkei Stock Average might hardly be moving, repeating ups and downs.
The market environment has changed.
Nevertheless, the memory of having “won” recently remains strong in your mind.
As a result, you may end up entering a trade where you would normally pass, increasing your lot size, or being late to cut your losses.
Be especially careful the day after a big win.
I believe that you need to be careful not only after a big loss, but also after a big win.
When you win big, the impression that your judgment was correct remains strong.
For example, the previous day,
The Nikkei Stock Average falls.
The stocks you are monitoring are also weak.
Short the rally.
It continues to fall, resulting in a large profit.
Let’s assume you were able to execute such a very clean trade.
The next day, when you see a similar pattern,
“It’s the same as yesterday”
you become more likely to think.
However, just because the chart looks similar does not mean the price movement will be the same.
Even if the Nikkei 225 was in a clear downtrend yesterday, the index might be finding support today.
Even if it couldn’t recover after breaking below the VWAP yesterday, it might be reclaiming the VWAP immediately today.
You need to look at today’s market conditions rather than the memory that “I won with this pattern yesterday.”
The opposite happens right after a loss
The availability heuristic also works strongly after a loss.
For example, suppose you incurred a large loss yesterday.
Then the next day,
“What if it drops again?”
“It might end up like yesterday.”
“Maybe I shouldn’t enter today.”
you become more likely to think.
Being cautious in itself is not a bad thing.
The problem is making decisions based on the “memory of losing yesterday” rather than the current market.
The Nikkei Stock Average has a clear direction, the daily chart looks good, and looking at the VWAP and 5-minute chart, a situation that fits my rules has arrived.
Even so, I cannot enter because yesterday’s loss is still on my mind.
This is also a state where your judgment is being dominated by recent experiences.
When you lose on the same stock, you become afraid of that stock.
The same thing happens on a stock-by-stock basis.
Suppose you have been stopped out twice in a row on a certain stock.
Then, the next time you look at that stock,
“This stock and I don’t get along”
“I’m going to lose again”
you may get an impression like this.
Conversely, if you have made a profit on a stock many times,
“I can win with this stock”
you may feel this way.
However, it is not easy to decide whether a stock itself is compatible with you or not.
What is important is the market environment at that time.
Correlation with the Nikkei Stock Average.
The trading volume for that day.
The position of the daily chart.
The positional relationship with the VWAP.
The shape of the 5-minute chart.
Presence or absence of catalysts.
Even with the same stock, if the conditions are different, the price movement will be completely different.
You must judge based on today’s conditions, rather than thinking, ‘I’ll buy it because I won on this stock last time,’ or ‘I won’t touch it because I lost on it last time.’
Larger losses are more likely to remain in your memory.
Between a 1,000 yen loss and a 50,000 yen loss, naturally, the 50,000 yen loss will be more strongly etched in your memory.
Therefore, a trade where you lost a large amount is more likely to influence your subsequent decisions.
For example, if you have the experience of being heavily squeezed on a short sell, you might become afraid of short selling itself afterward.
However,
‘I lost a lot on a short sell’
and
‘Short selling is dangerous, so you shouldn’t do it’
are not the same thing.
What you should confirm is why you lost that trade.
Were you going against the market trend?
Was your stop-loss too late?
Was your entry position poor?
Was it a trade outside of your rules?
Or, did you trade according to your rules but just happen to lose as a result?
You need to separate these and think about them individually.
Look at ‘whether it was according to the rules’ rather than ‘whether you won or lost’.
In day trading, you can make a good trade and still lose.
Conversely, you can make a very sloppy trade and win by chance.
This point is extremely important.
You entered a trade by breaking your rules.
Your stop-loss was also delayed.
Even so, the stock price luckily recovered and you made a profit.
If you look only at the result, it is a “win”.
However, if you strongly remember this win,
it may lead to incorrect learning,
thinking that “this method is fine too.”
Conversely, you might check the daily chart, market sentiment, VWAP, and 5-minute chart, enter according to your rules, but still hit a stop-loss.
While this is a “loss” in terms of results, it is not necessarily a bad trade.
I believe it is important to look not just at whether you won or lost, but at whether you were able to trade according to your own rules.
In my case, returning to “today’s market sentiment”
In my day trading, I place importance on the daily chart and market sentiment.
Therefore, regardless of whether I won or lost the previous day, what I should look at first does not change.
Is the Nikkei Stock Average strong or weak today?
Is there a sense of direction?
Are the stocks I am monitoring linked to the index?
Where is the daily chart positioned?
Is it above or below the VWAP?
What is the movement on the 5-minute chart?
Is the current market suitable for my strategy?
I check these things.
Even if you won 30,000 yen yesterday, if the Nikkei Stock Average lacks direction today and your strategy is difficult to apply, there is no need to force a trade.
Conversely, even if you lost 30,000 yen yesterday, if today’s market conditions are favorable for your strengths, there is no need to miss an opportunity just because of yesterday’s loss.
Look at today’s conditions, not yesterday’s results.
This is important.
Do not use winning or losing streaks to predict the market
“I’ve won three times in a row, so I’m bound to lose soon.”
“I’ve lost three times in a row, so I should win soon.”
You need to be careful with this way of thinking as well.
There is no direct relationship between your wins and losses and the next stock price movement.
It is similar to how just because you flipped a coin and got heads three times in a row, it does not mean you will definitely get tails next.
Even in day trading,
“I’ve been winning lately, so I’ll win today too.”
“I’ve been losing lately, so I should win today.”
Instead of thinking this way, you need to confirm whether you have an edge in the market right in front of you.
A mindset to prevent the availability heuristic
If you feel like you are being swayed by recent wins or losses, try thinking about it this way for a moment.
If you didn’t know the results of yesterday’s trades, would you still enter here and now?
Would you still want to buy even if you forgot that you won big yesterday?
Would you still pass on the trade even if you forgot that you lost big yesterday?
Asking this question makes it easier to check whether recent wins or losses are interfering with your current judgment.
Another important thing is,
Is this an entry according to the rules?
This is the confirmation.
Entering because you are winning.
Entering because you want to make up for a loss.
Not entering because you are afraid after losing yesterday.
Instead of these emotions, look at whether the situation fits the conditions you decided on in advance.
The same starting line the day after a win and the day after a loss
In day trading, the market is different every day.
A stock that was very strong yesterday might be weak today.
The Nikkei Stock Average, which fell yesterday, might rise significantly today.
A strategy that worked yesterday might be difficult to use today.
That is precisely why it is important not to bring yesterday’s wins and losses into today’s market.
There is no need to get overconfident just because you are on a winning streak.
There is no need to get more discouraged than necessary just because you lost big.
What you should be looking at is,
Is a situation that fits my rules occurring in today’s market?
That is the question.
Recent wins and losses are important data for reflection and improvement.
However, you must separate them from the basis for deciding your next trade.
Set aside the version of yourself that won yesterday, as well as the version that lost yesterday.
Instead, make decisions based on the information right in front of you, such as the daily chart, market sentiment, indices, VWAP, volume, and the 5-minute chart.
To avoid being swayed by the availability heuristic, it is important to return your judgment to “what is happening now” rather than “how things have been recently.”
For those who want to learn more about day trading
On YouTube, I host a live day trading stream every morning starting at 8:30 AM.
While watching the actual market, I provide real-time commentary on indices like the Nikkei 225, as well as decisions regarding entries, profit-taking, and exits.
▶ Click here for YouTube
[YouTube Link]
For those who want to learn in more detail
In my YouTube membership, I share content that cannot be fully covered in regular videos or live streams through exclusive videos and more.
Past videos and live streams are also moved to members-only status after a certain period of time has passed since their release.
▶ Click here for membership details
[Membership Link]
For those who want to practice day trading with a game
I believe that in day trading, it is important not only to memorize knowledge but also to repeatedly make decisions such as “buy, sell, wait, or exit” while watching the market.
Therefore, I have released a day trading game where you can practice the concepts I value in actual trading, such as indices, market conditions, and supply and demand, in a game format.
▶ Click here for the day trading game
[Link to the game sales note]
https://note.com/nihonnkaburabo/n/nc925792b480d
I am also updating day trading articles on note
I write articles about day trading methods, ways of thinking, trading psychology, and points I am conscious of in the actual market.
If you find the articles helpful, please follow me on note as well.
*This article is provided for the purpose of learning knowledge and concepts related to investment and does not recommend the buying or selling of specific stocks or financial products. Investment carries the risk of loss, including the loss of principal. Please make actual investment decisions based on your own judgment and responsibility.
