As traders will fall into the same psychological traps and make the same mental mistakes, the first step for breaking the cycle and avoiding counterproductive behavior is to gain an understanding of the trading biases we face. In today’s video, I will share a catalog of 10 psychological errors to which traders fall victim and the common biases we should all seek to avoid.
The confirmation bias:
Confirmation bias is the tendency to search for interpret favor and recall information that supports our own decision and assign a lot less weight to information that does not. We tend to believe that which supports our current beliefs, and we tend to ignore that which challenges those beliefs. Confirmation bias occurs when you take a position in the market, and then focus mainly on the technical indicators or market news that support staying in that position. Any fundamental or technical warning sign is not taken into consideration and the information is squashed. In this example, let’s say you analyze the chart and conclude that the price will go up. From that point onwards, you will look only for confirmation of a bullish price trend. Every indicator or price pattern you find you’ll be viewed and interpreted to confirm your view, price should go up. And an indication that the price might do the opposite, like this downward breakout will be mostly ignored. There’s a lesson here for all of us. The solution is to seek out and understand information that disagrees with our existing beliefs and evaluate information as rationally as possible.
The self attribution:
Have you ever noticed that you tend to blame external forces when your stops are hit, but never give credit to those same forces when your targets are hit? When we went rates, we want to believe that this is due to our brilliant decision-making skills rather than luck. When we lose good tend to believe that is due to bad luck. Otherwise, we’d have to admit that our losses could be due to poor decision-making skills. Picture two scenario, you place a trade on a company but soon after its stocks begin to fall. You don’t blame the friend who told you about a company or the post on Reddit or even the market itself we’re going down. This instinct means you fail to look at the bigger picture because you neglected to take into account market trends or the latest financial updates from a company for example. Now let’s reverse the scenario. Say the company is successful and the stock starts to increase. This time you believe you always knew the company would be a good investment, the company’s success becomes your success. See the difference right. In the long run. This self-attribution bias is a negative phenomenon that can lead to skill deficits and failures.
The hindsight bias:
Have you ever looked at the chart and immediately assumed that you would have known exactly when to enter and exit a trade that occurred in the past. This use of hindsight is very common, and it gives you a false sense of confidence in your trading abilities. It is a dog chart and believe we would have known exactly what to do at just the right moment. In hindsight, anyone can see that Bitcoin was about to explode, or a stock market crash was imminent. However, things that seem obvious in hindsight, were much less obvious at the moment they occurred. To overcome hindsight bias, you have to think in terms of probabilities. The correct trading decisions are not based on what happened after you decided to enter into a trade. It is based on the probability of what was happening at that moment. You cannot let hindsight bias determine whether a trading decision was correct or not.
This is the name given to the process of focusing on irrelevant numbers. In trading terms, the number most likely to fill this role is the entry price of a trade. Many traders care a great deal about the current price versus the entry price, but the latter is irrelevant to the future movement of the price. Mentally anchoring the trades to the entry price can lead to poor trading decisions. For example, imagine that you have bought a stock near the support at $50. The stock then breaks support enforced on your low at $40. Technically speaking, the stock is now a sell, however, may be reluctant to exit the position. Because you wish to break even you only care about getting out $50 and thus ignore important information. You are mentally anchored to the entry price of $50. In reality, the entry price has no bearing on what will happen next. The important information is that the stock has broken support and reached a new major low. The entry price of $50 is now irrelevant. You may care about your entry price, but the market doesn’t. The key to overcoming this bias is to be objective and flexible, being able to evaluate prices and make decisions impartially. Regardless of what your current position is.
Traders tend to base future upward objections on past performance. This list or behavior known as JC performance, it’s the feeling when you think you have to double your account by next month. While you are missing out if you don’t make a lot of money as soon as possible, this list of higher risk and large position sizes. How do we explain traders desperately buying at high prices as stock prices continue to rise, or those who buy bitcoin at very high prices, because everyone’s talking about it? The FOMO feeling that you are missing out on red darts has probably led to more bad decisions than any other single factor. Chasing performance simply means you create a false expectation and a sense of overconfidence, which can harm you in the long run.
We tend to place greater emphasis on our own experiences while giving less consideration to the experiences of others. And we tend to place even greater importance on experiences that happened in the recent past. For example, have you ever found yourself in a profitable trade, yet you weren’t happy with a result? Have you ever believed that you should have made more money want a winning trade? Imagine the following scenario, you buy a stock at $30 and exit is $35 for a $5 profit per share. Another trader buys the same stock at $30 but doesn’t take it at $35. He continues to hold a stock as it rises to $40. As he continues to hold the stock then falls back to 35. And at that price, he exits. Both of you achieved the same result by buying authority dollars and selling 35. However, your experiences were not the same. You are probably pleased with our result, and may not even be aware that the stock climbed to $40. Meanwhile, the other trader had the opportunity to set up $40 but failed to do so and because of this, he is less satisfied with the result. This emotional reaction comes as a result of placing too much emphasis on what he experienced. The point is, there’s no reason to blame yourself because you didn’t buy at the bottom or sit at the top. Picking tops and bottoms may seem easy in hindsight, but attempting to do so in real-time can be difficult.
Framing drillers are constantly faced with questions. Should we buy the stock at this price? Is this currency undervalued? Should we hold on to this trade? Or should we get out? Studies have shown that the answer we give to the question depends on the way the question is framed. The conclusions that we draw can be affected and sometimes manipulated based on how the question is posed by trader hunter stands the concept of framing can affect his behavior by consciously determining the meaning in the context of a win or a loss. For example, trader a may believe that taking a loss makes him a loser. By taking this stance trader is mentally framing the loss in a harsh context, there’s a good chance that this trader will feel tempted to hold on to all his position because he wishes to avoid being labeled as a loser. Meanwhile, trader B frames losses differently, he views taking a loss as just another part of the trading game. Therefore his self-worth is unaffected by the outcome of the trade. Because of this, trailer B finds it easy to take a loss and move on.
Underestimating Sample Sizes:
How often have you felt invincible after having four or five winning trades in a row and then lost a bunch of money on the sixth trade because it took too much risk? And how many times did you change your trading strategy or adjusted your indicator settings after your last four trades in a row because you thought your strategy wasn’t working anymore. That’s a common problem. Traders do often make assumptions about the accuracy of their system based on just a few trades, or even change their parameters after only a few losers. The decent sample size is 40 to 50 trades. Try not to change anything about your approach before you have reached this number. And make sure that you follow the same rules to get an accurate picture of your trading within a sample size.
The Illusion Of Knowledge:
Let’s face it, at one time or another, we all fall victim to the illusion that having more information will result in a better trading outcome. In reality, too much useless information can be negative, it’s much more important to have meaningful information than it is to have a large quantity of information. At the end of the day, meaningful information is what moves the market. Numerous studies have shown that increasing information leads to increased overconfidence rather than increased accuracy, which can be detrimental to decision-making.
The Illusion Of Control:
This is the belief that we can influence the outcome of one uncontrollable event. This false belief causes traders to veer away from their trading players or to make constant adjustments to their trades. This list today illusion that you are in control of the situation when in fact there’s no With a degree of random activity present in any market, the illusion of control causes the trader to abandon his trading strategy.