When your money is at risk, you get easily fooled by your behavioural biases. Trading is about decision making, making all the right decisions, so its better to know your strengths, weaknesses and what sets your emotions off.
Before we can go further into biases, we first need to know what a bias is. A bias is a cognitive error or behavioural mistake. When we are biased, it limits rational decision making because our feelings and emotions get in the way. Our judgment falls away because we base it on emotions rather than fundamental thinking.
Why is it important to know your own biases?
Knowing our own biases is essential to understand our limits, possibilities and how to improve our trading. Knowing the collective forces in the markets give you an edge. Understanding yourself goes hand in hand with understanding the markets, because as a trader you are part of the force that drives the market and moves prices. Majority of traders are against losing, the majority tend to anchor down when in a loss. The more you know about biases the better you understand the market.
The next article we will look at some of the biases a trader experiences and how we can overcome our own personal biases.
Ryan Mowatt, The Performance Coach