Understanding market probabilities and the needs of trade is probably the best solution.
Traders being human often fall in the grasp of biases. It acts as an obstacle that hinders a trader’s success to prosperous trading. The realization of this fact could be used to remove the effects of such biases and move ahead towards successful trading.
Some of the biases are as follows:
Anchoring Bias
In this, the anchor acts as the first piece of information. This bias is about giving too much importance or weight to the anchor while making decisions.
As for example, a powerful bullish thrust triggers off a trading session. As per the information, the trader gets convinced it is going to be bullish trend day. So the trader gets anchored to this information. Even though the market shows clear signs of exhaustion, the trader kept to his idea of it being bullish and realizes at the end of the day that he spent the entire session fighting. A balance should be maintained between analyzing historical data and not holding onto past conclusions.
Recency Bias
This is based on the fact that human brains give more importance to recent experience. For example, traders often avoid trades that remind them of recent losses. A trader suffers loss in a series of pullback trades in a healthy trend. He gives that up and switches over to trading range break-outs. The recent happenings make him overlook the fact that most of the profit in the past was due to pullback trade. So such a decision may not be right.
Confirmation Bias
It is human nature that we do not like people who contradict our thoughts. We do like people whose thoughts are more or less similar to us. This makes a trader self-deceptive. The trader fails to see what the market is trying to show.
Post-Purchase Rationalisation
After making a purchase, traders as humans tend to rationalize and prove that purchase so done was right. This is especially applicable for expensive purchases. Considerable effort was put in to find one good trade but the trader refuses to accept the fact it could be losing trade. Several warning signs are not looked into and the opportunity of moving out with a small gain was lost and it resulted in a substantial loss.
Bandwagon Effect
It is a fact that humans follow the race and do things because everyone is doing it in spite of the fact that there is no good reason for doing it. As a result of this bias, the trader tends to follow the herd, listen to everyone else and does not see what the outcome of the market is and the result is definitely not a very good one.
Hindsight Bias
“Yes, I knew it all along.” (No, you don’t)
For example, the trader takes a look at some historical chart patterns and acts like he is sounding sense and convinces himself that he would catch the next bull market. But the next bull market came and went and the trader didn’t even notice.
Attribution Bias
A human considers that all good things happen because of him and when bad things happen he manages to shift the blame away from him. As for example, after an excellent trade, the trader considers himself to be the one responsible for all profits. When the reverse happens, he doesn’t lose a second to blame the market, his broker or even his computer.
Illusion of Control
This is the bias which gives the fake understanding that one can control all events when it is actually the opposite.
A trader thinks he can control if his next trade is profitable. He thinks he could make money in all his trades because everything is under control. The thought of controlling the result of the next trade is like having the belief of controlling the outcome of the market, which is absurd.
Bias Blind Spot
A trader watches his friend doing trade and understands that he is doing it wrong and he is biased. On reviewing his own decisions he finds that he has made less biased decisions. This happens because he is affected by bias blind spot.
