On Ed Seykota’s web site (The Trading Tribe) he was once asked about using index cards with charts. The reader wanted to know how that worked. Ed responded:

You can use index cards with charts; use a card to cover up the right side of the graph, and reveal it to yourself one day at a time…

This is a key. As a chart slowly reveals itself think about what the best way to trade it might be. You only get one bar per day. That bar must tell you what to do long before you know what the end of the chart (or trend) will look like.

The index card exercise is the most compact description available of what it actually means to trade in real time. Every completed chart that shows a clear trend looks obvious in hindsight. The entry point is obvious. The exit point is obvious. The magnitude of the move is obvious. But the chart was not revealed all at once. It was revealed one bar at a time, and at each bar, the right course of action was not obvious. It required a rule that produced a decision based only on the information available at that moment, not on the information that would become available later.

This is the complete argument against hindsight-based criticism of trend following. Critics point to charts and say: you got out too early, or you got in too late, or the system missed this move. The criticism assumes access to information that was not available when the decision was made. The index card exercise strips that assumption away. Cover the right side of the chart. Reveal one bar. What do your rules say? That is the question that matters. Everything else is hindsight.

The volatility framing connects directly. Volatility is the measure of how much each day’s bar can move the position’s value and therefore how much any single bar reveals about the current state of the trend. A high-volatility market produces large bars that quickly reveal or refute a developing trend. A low-volatility market produces small bars that reveal the trend gradually. Position sizing based on volatility, the ATR-based approach used in the TurtleTrader rules, adjusts the bet size so that each bar’s potential impact on the account is consistent regardless of the market’s current volatility regime. In high-volatility markets, fewer contracts ensure that a large bar does not produce an outsized account move. In low-volatility markets, more contracts ensure that the small bars still produce meaningful exposure to the trend.

The index card exercise teaches this viscerally. As you reveal one bar at a time, you experience the uncertainty that each bar represents. You do not know whether today’s move is noise or the beginning of a trend. You do not know how long the trend will last or how large it will become. You know only what the rules say given the information on the visible portion of the chart. That is the complete information set of the real-time trader. The rules must work with that limited information. Trend following rules do. They enter when a defined threshold is exceeded, exit at a predefined level, and size the position based on current volatility. No hindsight required. One bar at a time.

Frequently Asked Questions

What is the index card exercise and what does it teach?

The exercise involves covering the right side of a price chart with an index card and revealing it one bar at a time. The goal is to experience trading decisions as they were actually made, with only the information available at each moment rather than the complete picture available in hindsight. It demonstrates that the obvious-looking trends on completed charts were not obvious at the time they were developing, and that rules must work on single-bar information rather than retrospective pattern recognition.

How does this exercise relate to volatility in trading?

Volatility determines how much information each bar provides. A large bar in a high-volatility market reveals more about trend direction but also creates more potential for account impact. Position sizing based on volatility ensures that each bar’s potential effect on the account is consistent regardless of how large the bars are in any given market. The exercise makes this tangible: as bars vary in size, the rules must produce consistent decisions about position size and exit points based on the current volatility, not on an assumed stable volatility that may not exist.

Why is hindsight criticism of trading systems invalid?

Because it uses information that was not available when the decisions were made. A chart that shows a clear trend in retrospect was a series of ambiguous bars at the time each one formed. The index card exercise demonstrates this directly. Any criticism of a trading decision that requires knowing what the chart looked like after the fact is not a valid critique of the decision made at the time with the available information.

Trend Following Systems
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