COMMON TRADER BIASES

Feb 13, 2023

🔴 Let's talk about the typical biases in trading that many traders experience on a regular basis. These biases are some of the most common ones we encounter in trading, and if you don't recognize them, they may be the cause of your failure in forex. It will be lot simpler for you to deal with them and comprehend why giving in to them can harm your results if you are able to think probabilistically.


▶️ Recency Bias
It is a common mental tendency where people tend to focus more on what's happening now, rather than what happened in the past. This is known as a cognitive bias, and it affects traders. People who have had success in the past are more likely to be overconfident in their next trades, expecting things to go their way again. However, each trade is unpredictable and has no connection to the ones that have come before or after it. Knowing this can help you manage your emotions while trading.

▶️ Loss Aversion Bias
Some people have a tendency to feel the effects of losses more than they do of wins of equal magnitude. This can often lead to lower performance. Traders are focused only on avoiding losses will miss out on big opportunities for gains and lose their positive edge. Remember each trade is just one data point in a larger distribution. There will be losses. Don't avoid trades out of fear because you can't avoid them - embrace them as part of the process. Don't let past losses make you doubt yourself if you have a positive edge. If you win more when you win than when you lose. The Law of Large Numbers is working in your favor. Instead of thinking about things emotionally, think probabilistically. This means thinking about the likelihood of something happening, rather than just assuming it will happen. This can help you make better decisions and avoid losing trades.

▶️ Confirmation Bias
Absorbing information only that supports your views. It is seductive to look on your past conviction favorably because it feels good, but doing so increases the risk of missing crucial information that could help you get your conviction overturned. With objective rules, you can determine whether your advantage is present. Without appropriate rules, you'll start to see only what you want to see. To prevent this bias, it is crucial to have a positive statistical advantage and strict rules to follow.


▶️ Bandwagon Bias
In general, this is entering trades that everyone else is in because you don't want to miss out. The latest hottest trade is often referred to as FOMO (Fear of Missing Out). By doing this, you are giving in to your emotions and going along with the crowd rather than following your own well-defined and positive edge. Forget about the others and simply focus on yourself and your competitive advantage. All other information is noise.

✅ Conclusion
These biases, as you can see, are of a temporary. Which, as we have discovered, is extremely risky for our trading because it is a long-term game in which we allow our edge to develop gradually. We are aware that in order to succeed in trading, we must take the long view and trust the probability. You will ruin your trading and your trading account if you fall to these biases in the short run. But by becoming aware of them, you can take some action to change your frame of reference in the present and prevent these biases from ruining your trading performance.