Psychology of trading: how to overcome yourself and achieve success (Part 4)

Bias and errors of judgment

Bias in trading is the inability to conduct an independent analysis and make an objective decision.

There are several varieties of bias.

Representative bias.
For example, objectively you will have conditions to buy USDJPY. But you'll reject the trade because you've made a loss on this pair before. And instead of trading the yen, you would choose EURUSD - even though conditions were not good there, you had positive experiences trading the euro.

Being biased towards negativity.
It means that the trader pays too much attention to risks and tends to see danger where there is none. It can lead to closing a profitable trade, even if it develops according to the expected scenario.

Status-quo bias.
It means that the trader tends to continue to use "proven" strategies or markets, and not take into account new information. This may work for a while, but the danger is that the trader will not be able to adapt in time to constantly transforming markets.

Confirmation bias.
This occurs when a trader looks for or exaggerates the value of only those arguments that support his pre-formulated ideas. At the same time, he will turn a blind eye to facts that refute his beliefs.

The player's fallacy.
It means that people tend to assume that if the price has already risen, it will continue to rise. The opposite view-"if it has risen a lot, it must fall"-is also not well reasoned. However, this kind of reasoning is often the basis of transactions that end in losses.

Loss aversion.
Traders refuse to record losses so as not to hurt themselves. Admittedly, the roots of this practice go back to the instinct for self-preservation. But in the financial market, it is vital to teaching not only to tolerate the pain of losses but also to accept them neutrally, because losses are inevitable. Otherwise, the hope that a "floating loss" will go away on its own can completely destroy capital. Or, aversion to losses can lead to the so-called disposition effect, when traders sell their profitable positions and hold unprofitable ones (while they should do the opposite).

Advice

To fight prejudices, use two simple things - a trader's diary and a trading plan. Create and maintain them in a disciplined way, and be honest with yourself by answering questions like:

• "what should I have done?"
• "Why did I do wrong?"
• "what should I do to act as written in the plan?"
• "How will I correct the mistakes?".

The way to solve problems will be unique because each person has his or her own personality, unique experience, and set of knowledge and skills. There is no ready-made formula; you will need to work hard on yourself. It is important not to blame the market, as if it acts out of spite! Everything that happens in your life, including trading, depends primarily on you.
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Follow our updates for useful information in our series of articles. You can also visit our previous article to better understand this topic.