How to reduce the bias effect in your trading

How to reduce the bias effect in your trading

If you plan on thriving as a trader, you must work towards recognizing and removing trading bias from your mind and from your daily activity.

How many times have you said no to a great trade and then looked back with regrets of not going in? Have you ever entered a tremendous looking trade and exited too early, only to see the trade end up being a huge winner? Or have you ever contemplated trading the markets, but you were simply too afraid to try?

These cases can often occur when you get involved in the #financial markets or you simply plan to do that. And they all have to do with the concept of bias, something that you can fix if you follow some basic steps.

What is bias?

As human beings, we can all be wrong sometimes due to the many influences that govern our lives: emotional, psychological, social, or even genetic factors shape our worlds. All these factors create our biases, which get to dictate how our mind functions and how we approach trading.

Avoiding biases or removing them from our daily market activities can be very tricky. However, suppose you plan on becoming a good trader. In that case, you need to find a way to reduce the impact of these negative emotions.

But first things first: let's see how many categories of biases you can encounter.

Types of biases:

Investopedia.com mentions three major types of biases that could potentially interfere with your trading: sensory-derived bias, fear of the unknown, and anticipation bias.

There is no magical solution to overcome all of these. Still, at least you could try and contain them.

Time to find out more about each category of bias!

Sensory-Derived Bias

The way we perceive things around us often comes from our sensory-derived bias. For example, we filter the information that we receive from different sources. Still, our overall opinion doesn't rely on factual, unbiased evidence. How come? Simple: it would most likely derive from the media, be it online or offline. Think for a second: if you follow a specific website for a year and trade based on that info, then is your trading unbiased? If you only follow one source, can you also call it 100% factual?

More often than not, a single viewpoint can prove counterproductive for your trading. You don't get any counterevidence, no second opinion, nothing. This is one aspect of your trading psychology that you could try changing right away.

Fear of the unknown

The fear of the unknown prevents us from doing many of the things that we’d love to. Into this category also falls traders sticking to their comfort zone and not wanting to try something different out of fear, like a promising new market or strategy. Some traders prefer staying glued to their strategy forever, no matter whether it's outdated, unsuccessful, or simply not providing the desired results. Try and avoid these things. Keep your mind open to the new and try new systems and trading strategies whenever you have the opportunity!

One more aspect to discuss here: experts advise to avoid holding onto your losing trades for too long. At the same time, experienced traders tell us not to get rid of winning positions too fast, either. Psychological biases can become dangerous in stressful situations, so carefully assess each scenario and decide based on #fundamental and #technical analysis.

Anticipation bias

Anticipation can quickly become a problem instead of a solution. Many traders make anticipation one of their primary focus, becoming addicted to the possibility of being rewarded for wishing for a positive outcome. However, if they fail to act, then all would be for nothing.

Trading means sticking to your plan: when you see an opportunity and decide to go for it, there's little room for anything else. Don't get lost in the dream world! Make everything real by taking the initiative.

Different factors can potentially cloud your judgment regarding anticipation bias. The market sentiment, shady blogs/websites, or even friends who share the same trading passions with you fall into this category.

How to overcome bias

Conquer the fear of loss

The fear of losing could lead to poor trading choices such as placing stop-orders that are too tight or leaving trades when you should have kept them. And in no time, you could find yourself in the wrong place.

If you keep convincing yourself that losing streaks won’t come to an end, you will get nowhere. The sooner you understand it, the better. No two trades are ever the same. Treat each one of them individually, as new experiences.

As long as you follow your plan, concentrating on your strengths and proven strategies, the tables might eventually turn. Don't allow some setbacks get the best of you. With enough patience, perseverance, and commitment, you will become more experienced, and your vision will change.

Suppose you need a day, a week, or even a month to get rid of your negative emotions. In that case, it's ok to sit back and relax until you’re comfortable enough to start trading with a positive mindset.

Overconfidence vs. lack of confidence – finding the middle path

Being optimistic is one thing and aiming for the moon is another thing. In trading, you should always consider following the middle path. Way too many traders lose their heads early, neglecting the basics and getting discouraged at the start after a couple of unlucky trades.

Spending your time learning and practicing in the beginning, would reward you later when you finally settle upon a trading system and strategies. If you haven't decided what type of trader you'd like to be, look at our article here.

Additionally, if you need guidance and information about how the financial markets work, check out our Trading Academy! In there, you will find dozens of educational videos explaining essential trading concepts and much more! Building your confidence is vital if you plan on succeeding in the financial markets. The only way to go is by educating yourself!

Planning ahead and harnessing your intuitive thinking

Feeling and intuition are two key features that every trader out there needs to have in their skillset. Both these traits can be grown if you are determined to focus on facts and not on fiction. Past experiences help a lot because one can only learn from what went wrong more than what went right.

Follow this simple piece of advice from the experts. Your intuition and feel will develop slowly but surely, helping you tremendously in the long run. Once this happens, the entire trading process could potentially get more straightforward, and you could see how the whole picture gets a lot clearer.

However, developing your intuition and strategic planning has to be combined with a proper market education if you want to improve your trading.

Conclusion

As a trader, you need to work to overcome and eliminate all the various obstacles in your path if you plan on improving. Learn how to practice good risk management and size your positions correctly, as both solutions are excellent against trading bias.

Also, experts recommend never entering a trade without placing proper market orders, like stop loss or take profit. We can’t stress how important this aspect is, irrespective of your skill level or knowledge!

Sources: investopedia.com, thebalance.com, babypips.com

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