Biases: They Can Be Bad for Your Trading
Biases: They Can Be Bad for Your Trading
Derek's eyes got wide as he looked pensively at the charts displayed in his trading platform. He had entered a counter-trend trade on the ES and it was not working out as hoped (his first mistake ñ hoping is not for trading). He had his trading plan well in tow and the analysis that it was based on did not actually come from him, but from an opinion piece in Bloomberg that said that markets were going to go up, even though the price action told a different story.
After he heard that "bit" of information from Bloomberg, he impulsively entered the trade as he was moved by an internal bias that was based upon something external to him, and that eventually had turned against him and ended in a loss. He felt like he had been cheated; he had believed that they were right. After all, this was the news and even though he chose to "listen" to the opinion piece without doing his own homework, he still emotionally thought that he should have won and "it was their fault." Actually, if he were honest with himself, this type of trade went against the philosophy of his rules which pointed out that counter-trend trading was not a high probability endeavor; and therefore, he should have lost, but he was having none of that type of thinking.
So, here he was, feeling betrayed, sick to his stomach and stupid because he had let an outside opinion unduly influence his behavior. The internal bias that he responded to has a name, it's called a Confirmation Bias (the tendency to search for or interpret information in a way that confirms one's preconceptions). He went on a preconceived notion that the news was correct simply because it was the news...he believed. Once he began to look at the charts, his preconceived belief, i.e., his bias, distorted his perception of the information on the chart. In other words, he began to look for confirmation of the preconceived belief as based upon what he heard.
Humans have many biases that are for the most part out of awareness; but biases are not inherently negative. There are many biases that can serve you; for instance, having a bias that looking at multiple time frames is supportive to having a sufficient amount of information. However, biases are often limiting in nature and therefore, become limiting beliefs. Beliefs are extremely powerful because to a large extent, they operate below awareness, which necessarily means that they are part of the subconscious or unconscious. See, the mind is analogous to an iceberg where the tip of the iceberg is awareness, and all the huge remainder of it is underneath the surface or subconscious. What you are aware of is called your conscious mind; and all the rest is your unconscious mind, which has the overwhelming share of beliefs, thoughts, emotions and yes...behaviors that are out of awareness. That's why it's so important to uncover your biases, to become aware of them so that you can determine whether or not they are reflecting something that serves you, or reflecting a limiting belief or thought. Some of the more prevalent biases that are at play in your thinking and trading are:
- There is a tendency, especially for the novice trader, to fall prey to the "Bandwagon Effect," which is doing or believing something because so many others are doing or believing it. This is also related to what is called "a herd mentality." For instance, an extended rally where buyers are jumping onboard is susceptible to a severe pull-back or reversal because the bandwagon is finite.
- If you see yourself as less biased than others, you are exhibiting a "Bias Blind Spot." For example, if you believe that an economic report is going to go in a certain direction and you disregard the volatility of the markets which often follow, then you have a bias blind spot.
- Seeking out information even though the outcome will not be affected is an "Information Bias." If a significant resistance level has been hit and you are stopped out, but you go back to determine how "significant" that resistance level was, then you got caught up in an information bias.
- There is also "Framing Effect," using a description of a situation or an approach that is so narrow that the context holds a meaning that doesn't serve you. An example of this would be the concept of losses. The unsupportive frame might go something like this: Losses are for losers.
- "Loss Aversion" is another. We are much more opposed to giving up something than we are drawn to acquiring it. Losses tend to be twice as powerful as suggested by research as gains. This bias can cause one to be immobile in the face of pulling the trigger to enter a trade or to move a stop when it is threatened by the price action.
- "Negativity Bias" ñ illustrated by giving more weight and paying more attention to negative rather than positive experiences. If you've had five trades in a trading session, as exhibited by following your plan and keeping your rules, and you had only one loss, but find yourself focused not on the good discipline or the four winners, but only on the loss, then you have been influenced by a negativity bias.
The above bias examples are but a few of a long list of tendencies to think and do in pre-formed ways. It's not a bad thing to experience a bias; everybody has them. The important thing is to become aware of your biases, especially limiting beliefs, and begin to change them if they are not serving you. One of the ways to become aware of your underlying limiting beliefs, thoughts, emotions, and unconscious conversations (yes, you have conversations with yourself that are out of your awareness) is to use a Thought Journal. Thought Journals are powerful tools that begin to uncover and, in many cases, root out those subconscious motivations that are driving behaviors and causing results that you don't want. Most traders are aware of Trade Journals or logs. Trade Logs are also extremely important because they track and document all of the external or mechanical data associated with the trade; i.e., news, analysis, indicators, entries, exits, stops, etc. This is how you develop market knowledge and support your skill-building. However, it is just as important to track and document the internal data that is affecting and driving your behavior; that is, your thoughts, emotions, beliefs and behaviors. If you don't know what your internal data are, and how your internal data ñ your thoughts, emotions and beliefs ñ affected your execution, you can't change them. You can't change what you can't face, and you can't face what you don't know. You must begin to use your Thought Journal for all negative results, rule violations, emotional upheavals and behaviors that don't serve your trading.
Commit yourself to finding out what is keeping you from getting the results that you want and deserve. Learn the tools to bring your "A" Game to the trading platform. Your D, or C, or B game is not enough; and you know that, based upon the results that you've been getting. In Mastering the Mental Game, we teach you how to pull the top off your unconscious and help you to uncover the barriers to achieving success.
Have a great day.
- Woody Johnson
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