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Trading Psychology: Understanding Your Own Bias Part 3

In the last two articles we explained what biases are in trading and what some of the common biases are. This week we will be looking at how to overcome these biases.

 

We all have biases, its part of our human nature, and in order for us to work through them we first need to figure out what they are. This is an important first step to work through our biases but being aware isn’t enough to completely avoid them. Although we cannot completely get rid of our biases, we can reduce them to the point where it does not have such a big impact on us, reduce the frequency of them, and improve the quality of our decisions.

 

One way of doing this is to be aware of peripheral or external factors that could influence our processes, one such example is that of time constraints. Making decisions under time pressure can increase the likelihood of using a bias (this includes FOMO). One way to avoid time pressure is to prepare in advance. Instead of trying to improvise and rely on your intuition, always have a clear trade plan before you open a trade. The trade plan should have all the information you need to carry out the trade.

 

Another tool you can use to help eliminate these external factors is the use of a trading diary. Which could also help to combat your trading biases. This will help you improve your decision making and trading as you are keeping your thoughts and actions on record. It is a way of keeping you accountable to help prevent you from slipping into the bad habits you are already aware of (such as not taking stops) as well as illustrating or mapping out other potential issues that you might not yet be aware of.  This is an essential skill to have and should not be slept on. By using a trading diary, it could also help you to figure out what triggers your biases making it a lot easier to deal with them.

 

Actively monitor yourself for biases that might come up. Especially in a situation where the likelihood of a bias is high, take a step back and rethink the entire situation from another perspective. Avoid making decisions when you’re in a bad mood or you are not fully focused.

 

  • Ryan Mowatt, The Performance Coach

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