The Danger of Imagination Inflation for the Discretionary Speculator (draft)

As a general rule of thumb, traders trade the hard right edge of the chart. Ideally, the job is to analyze what IS, not what could or might be. However, we all naturally play the what IF game. A game that is in come cases a critical part of analysis.

It can be helpful to have some extra space to the right of the chart allowing the brain to simulate the various probable paths the market might take. This allows us to overlay our market world view or methodology onto this specific instance of the market.

During this phase it is best to be a neutral position simply observing the market plotting the various probable outcomes, with no intent to execute on them. Only when the criteria for a trade is manifesting do you enter stalking mode and begin to critically analyze the market on a deeper level.

The imagination inflation effect is a type of memory distortion defined as an increased tendency to falsely remember that an item has been seen, or an action has been performed, when it has only been imagined. (src)

However, it is critical that you are aware of the role the what if game you were previously playing may impact an objective neutral read of what IS. As you have already imagined the outcome you are looking for, with an ideal ending, you are more likely to view market generated information as supporting that narrative.

When reality clashes with your imaginary simulation of what could be, tilt can arise. This is because the simulated outcome, alongside the data you viewed under a biased lens, made the outcome seem inevitable. Yet, as we all know, stops are rule, not the exception.

This is all to say that playing the what if game has a time and place. It should be encouraged and explored in the idea generation phase of your analysis, however after your thesis has been generated, it is time to observe and execute. Not imagine the ideal outcome of what might be, then be disappointed and offended at reality when that idealistic simulation does not present.