Published on January 27, 2016
1. Trading Psychology 4 Most Common Biases to Avoid
2. Me against myself • When you start trading you expect to pitch yourself against the markets. But few peopleare aware that they are also competing against themselves. We’re human which has a lot of benefits when trading. However, it also means that we have to contend with emotions and our ego. • You can never remove emotion from trading but you can learn to identify your strengths and weaknesses and pick a trading style that suits you. • However, don’t think that using robots or automated trading is a better replacement than your own knowledgeand instincts. Education and self-control are the lynch pins to becoming successful in themarkets.
3. 4 Psychological Biases 4 psychological biases that may be affecting your trading results and what you can do to overcomethem • Overconfidence bias • Anchoring bias • Confirmation bias • Loss aversion bias
4. Overconfidence bias Think you’ve got the markets figured out? You’ve read every book and think there is nothing more to learn – you just need to trade and you’ll make money. If this soundslike you then you may be suffering from an overconfidence bias. What could go wrong? Overconfidence in trading may lead to over-trading. This is when you trade frequently or place very large trades trying to make it big. You end up risking too much on one trade that may go against you. Does this sound like you? “I’ve just been stopped out of this deal, but I can’t believe it’s gone bad so I’ll open another one”. Or: “I’m going to top up this trade with more money as I FEEL this is the one!” Overcome Your Bias. Setting strict riskmanagement rules that lay out your entry, exit and how much you invest (or are willing to lose) is key to overcoming this bias. Ensure to review your trading strategies and take breaks from trading.
5. What to watch for: You know you’ve fallen victim to anchoring bias when you convince yourself that a particular currency or market’s strength will continue even when other fundamentalfactors are pointing to the contrary. You become emotionally attached to a particular market or position and trade against the new trend. Overcome Your Bias: Get a new perspective on your trading. For example if you normally look at hourly charts, take a look at daily or weekly ones to get a macro view on support and resistance levels – also look at shorter term charts to look for reversals. Anchoring bias Have you ever lost money by holding onto a trend that has clearly ended? Then you could be suffering from an anchoring bias – the belief that the future is going to be similar to the present.
6. Confirmation Bias You know you’ve fallen victim to confirmation bias if you only look for information that confirms your existing beliefs. For example, if you believe Gold is going to go up, you will look for the news and indicators supportyour belief. Over coming confirmation bias: There are a number of strategies you could employ to ensure you don’t fall prey to this bias: After doing these you might re-asses your original belief or you might strengthen it – at least you’ll know you’ve done your due diligence. 1. Try to find information that disproves your theory – then compare it to the information you find that supports it and make a more informed decision. 2. Share your theory with others on forums and look for diverse perspectives that give you a broader look at what’s going on. Just talking about your theory out loud can give you a better perspective.
7. Loss aversion Bias No one likes to lose. And the fear of loss may be a greater motivator than greed. Have you ever held onto a losing trade hoping it will turn-around even though the indicators don’t support your view? Then you might be afraid of taking on a loss. All traders lose: It’s unrealistic to think that all your trades will come out well. All traders lose – they key is to lose less than you win. Acceptance: If you find it difficult to accept losing trades then make sure you set a strict riskmanagement plan than you adhere to. The plan should include how many open positions you will allow yourself at any one time and how much of your balance you will risk on any one trade. These strategies willhelp you spread your risk across your portfolio.
8. Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566). Not trading with easyMarkets yet? OPEN YOUR ACCOUNT NOW Your invested capital is at significant risk support@easyMarkets.com www.easyMarkets.com/about/contact-us www.easyMarkets.com
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