Why 2 traders can see different things when looking at the same chart
It's funny how you can take 2 different traders and show them the exact same chart and the same trading technique and you'll get 2 highly different outcomes. All things being equal, such as knowledge, experience and access to information, why do 2 different traders behave so differently when they see the exact same market data?
There are actually a variety of reasons why we may reach different conclusions. I hope this article will make you think more about the fact that several perspectives can exist on the market at the same time: yours and those of your opponents (those who are on the other side of your position). Thinking about these different perspectives and why they may exist can only help you become a better trader.
A position that is too risky
When a trader takes on a lot of risk on a transaction compared to his overall net worth, he invests emotionally in this trade. It may sound like common sense, but the implications are rather profound.
When you get too involved in a trade or investment, you are more likely to make a mistake. For this reason, 2 traders can literally be on the same trade, but if one of them has risked a much higher percentage of his net worth, it is very likely that he will see the chart quite differently and react quite differently.
The point to remember is that the more money you are risking, the more emotionally charged you will be with each tick on this chart. When you are very emotional (usually because you are overly committed, from a financial standpoint), you are more likely to see a short-term downturn as an imminent market correction that may well go beyond your point of entry and make you lose money. So, what do you do? Inevitably, when faced with this powerful emotion (fear), you'll exit this position with probably either a very small gain compared to what you had (since you're exiting when the market returns to your entry point), or you'll exit near break-even. Admittedly, this is always much better than a loss, but it can be very painful and disturb your state of mind, which leads to more errors.
For the trader who hasn't been over-committed, this same correction can be viewed differently: as a simple market correction. He can thus keep his position and stay in the game since the price turned around when the previous trader fled.
This is just one of many examples of how over-risking or being over-committed to a position can cause you to panic and sabotage your own trades.
To reiterate my perspective, we have 2 traders: one risked too much, the other risked a much lower amount. The one who risks too much will almost always panic and sabotage his trade, the one who didn't risk too much is more likely to have a favourable trading outcome.
Position bias
The simple fact of having an open position can lead you to see a chart differently from a trader who hasn't opened a position in this market. Even if you stay within your per-trade risk parameters and stick to your trading plan, you will at least be slightly influenced by the fact that you have money at stake and may lose it. This is basically why it's not easy to trade and why it's not for people with weak minds or whose emotions are easily influenced.
You've probably noticed that when you trade on a demo account, you get better results compared to trading with real money. The key to success is therefore to try to forget about the money and trade the markets and the forex as if it was just a game, and that money is just a way to keep the score, so to speak. The only way to do this effectively is to not go overboard. You should basically try to look at a chart as if you didn't have a position, even if you do have one.
Recency bias based on trading outcomes
2 traders who are trading the same configuration on the same chart may see this chart differently due to what we call "recency bias". Recency bias means that you have a bias, opinion, or feeling about something because of an experience you recently had with the same thing or with something similar. Thus, trader A may have already seen this same scenario and had a losing trade, while trader B may have made money under similar market conditions.
Retail traders tend to chase performance, often crowding into an asset class when it is peaking and about to reverse. When an asset price has gone up recently, traders think this trend will remain in effect. As humans, we are all more strongly influenced by recent events than by past events. This can either be good or bad in trading. Market conditions which are strongly trend-oriented make recency bias beneficial; because if you keep trading retracements within a trend, you will likely continue to make money. However, when the trend changes and the market starts to move sideways, you risk being beaten up if you don't read the price action quickly and realise that conditions are changing.
It is interesting to note that there are many different personality biases that can affect how a trader perceives the market.
Too attached to the market, or one's initial vision
People can become emotionally attached to charts (and certain markets) or simply their initial view of a chart for a variety of reasons, not just because they are overly committed.
For example, take a trader who has done extensive research on a market and has studied a chart a lot, he will likely get attached to a specific viewpoint. He will feel that the time he has spent studying the market must have value and he can't bear to think that the market is not doing what he expects. This pushes him to look for press articles and online articles that support his perspective of the chart (after all, you can find any opinion on anything online). It's basically about letting arrogance and one's ego dictate one's behavior. You can get too attached to a chart simply because you don't want to believe that you're wrong or that all of your research was done for nothing.
This is basically what we call excessive trust bias. It is due to the fact that you spend too much time studying a market and convincing yourself that you're right about what will happen next. Traders also become overconfident after a winning trade because they tend to be overly optimistic about their recent decision and attribute too much of the win to something they did rather than just a statistical occurrence.
Another trader who may not have this mental barrier (because he didn't do any research) probably has an advantage over the above trader. When you spend less time on something, you are naturally more neutral and less committed. This gives you a new perspective and, above all, a more objective one.
In trading, objectivity is key. That's why I'm generally against trading economic news or paying too much attention to fundamental data. Beyond learning price action and understanding trading terminology, there is no real benefit to doing more market research, in fact it can even hurt you because of what we just talked about.
Technical indicators vs. "clean" charts
One of the obvious reasons why 2 traders see the same chart differently is indicators. Some traders like to fill their charts with technical analysis indicators that literally make their charts look like works of modern abstract art.
The trader who uses simple, basic price action charts, without indicators, will inevitably have a different perspective on the same market; a clearer and more precise perspective.
Following the trend vs going against the trend
As in the previous case, it is true that 2 traders who have historically made money by trading the markets in different ways, will see the same chart differently.
For example, trader A may see a rising chart, but because he is a born nonconformist (he wants to trade against short-term momentum), he wants to take a short position, ideally at a key level, because he has already made money by doing this before (recency bias). He hates trading with the herd.
Trader B can see this same rising chart, but he wants to be long! Because he has regularly made money by doing this. He traded trends and made money. He never seems to want to go against the herd.
Neither approach is necessarily good or bad. Although it is riskier to trade against short-term trends, some traders simply have the gift of making the market disappear, or of finding where the market will reverse. However, for most traders, it is best to follow the trend.
The point is, each person will see the same exact chart, pattern or market configuration in a slightly different way and, for the various reasons mentioned above, react differently to the same market movement.
Conclusion
Two traders can indeed see the same chart differently and more often than not they will get different results from the same trading setup on the same chart. The common unifying element in trading is the chart's price action, it really is the great "equaliser". The price action takes into account all the variables that affect a market and which affected it in the past, and it displays it to you in a relatively easy to understand snapshot that is filled with clues. Learning how to read price action is how you can eliminate or significantly reduce most of the market variables that confuse and complicate the trading process.
The main reason why 2 traders see the same chart differently is due to a lack of discipline. Some traders systematically take on too much risk each time they trade, which obviously greatly influences their perception of what the market is doing and what it may do next. So you have to decide how you will look at your charts. Will you look at them with emotionally charged eyes and screens full of indicators, or will you look at them with calm eyes, with clear, easy-to-read charts?