Psychological Biases Sabotaging Your Trading Success

 In my last email I addressed principles that will imporve your trading performance...

...in this email, let's talk about what may be holding you back.

Our brains are designed to take mental shortcuts, allowing us to make decisions quickly without expending much energy.

However, these shortcuts can sometimes mislead us.

Biases act like hidden programs in our minds, subtly influencing our choices without our awareness.

In the world of trading, where emotions run high and rapid decisions are crucial, these biases can have significant impact.

They may lead us to make decisions based on; fear, hope, or past experiences rather than logic and a solid trading plan.

By identifying these biases, we gain a significant edge.

You will of likely heard of the most commonly discussed cognitive biases traders can sabotage their results with:

FOMO, overconfidence, loss aversion, gamblers fallacy, paralysis by analysis...

... these are all common issues you can probably relate to in your own trading.

Today we want to explore less commonly discussed biases, to expose your awareness to potential hurdles you may be experiencing;
 

1: Dunning- Kruger Effect

The Dunning-Kruger effect can be a real danger in trading.

This cognitive bias occurs when someone with limited knowledge overestimates their skills.

In trading, this often happens to new traders who experience a few early wins.

They might feel like they've "cracked the code" and become overconfident...

...leading to risky decisions like increasing trade sizes or ignoring risk management.

The issue is that their lack of experience prevents them from recognising their weaknesses or the market's complexity.

This is why staying humble, continuously learning, and maintaining a healthy respect for the market are essential for long-term success in trading.

2: Sunk-Cost Fallacy

The sunk cost fallacy can trick you into making bad trading decisions.

It occurs when you hold onto a losing position because you've already invested money in it.

You might think, "I can't sell now; I'll lose all that money!" But sunk costs are like spilled milk—you can't get them back.

The only thing that matters is the future outlook of the trade.

This is especially common now with prop firms.

I've had people join my mentorship who are down $60,000+ in challenges...

...and every time they pass a new account, they're aiming to get that back in their first payment, or go bust... again.

Remember, emotions can cloud judgment.

Successful traders focus on making the best decisions now, not trying to salvage past ones.

3: Regret Aversion

Regret aversion arises from the fear of making choices that could lead to future regret.

This fear can cause traders to hesitate, avoiding necessary actions like cutting losses on a failing trade or entering a new position with potential.

Such hesitation can prevent you from capitalising on market opportunities and managing your accounts effectively.

Missing out on profitable trading opportunities often leads to more emotionally driven trading in the future.

To combat regret aversion, focus on developing a solid trading plan and sticking to it, regardless of short-term emotions.

Emphasizing process over outcome can help you make more confident, less regret-fueled decisions.

4: Anchoring

Anchoring is a powerful concept in behavioral finance that can lead to poor trading decisions.

This bias occurs when traders fixate on a specific reference point, such as the entry price of a trade or a bias even when proved invalid.

Instead of assessing the whole chart objectively, they become anchored to the price at which they entered the market.

This can cloud judgment, leading to the disregard of broader market trends and important signals.

For example, a trader might hold onto a losing position simply because the price hasn't dropped below their initial entry point...

...ignoring the fact that market conditions have fundamentally changed.

Overcoming anchoring involves training yourself to evaluate each trade on its current merits, independent of past decisions.

5: Confirmation Bias

Confirmation bias leads traders to seek out information that confirms their existing beliefs while ignoring evidence that contradicts them.

For instance, if you believe a particular currency will rise, you might only pay attention to analysis that supports this view, disregarding negative price action or a shift in bias.

This selective information gathering can result in poor decision-making and missed opportunities.

To counteract confirmation bias, actively seek out diverse perspectives and consider all available data before making trading decisions.

This balanced approach can lead to more informed and effective trading strategies.
 

We can recognize when these hidden programs are at play, enabling us to step back, assess the situation objectively, and make trading decisions grounded in facts, not emotions.