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Common trader biases
🔴 Let's discuss the common trading biases that many traders encounter on a regular basis. These biases are some of the most prevalent that we run into when trading, and if you don't recognize them, they might be the reason why you don't succeed in the forex market. If you are able to think probabilistically, it will be much easier for you to deal with them and understand why giving in to them can hurt your results.
▶️ Recency Bias
It is a common mental tendency in which people focus on what is happening now rather than what has happened in the past. This is referred to as a cognitive bias, and it has an impact on traders. People who have had previous success are more likely to be overconfident in their subsequent trades, expecting things to go their way once more. Each trade, however, is unpredictable and has no relation to the ones that came before or after it. This knowledge can help you manage your emotions while trading.
▶️ Loss Aversion Bias
Some people tend to feel the effects of losses more than they do of equal magnitude wins. Lower performance is frequently the result. Traders who are only concerned with avoiding losses will miss out on large opportunities for profit and lose their positive advantage. Keep in mind that each trade is only one data point in a larger distribution. There will be setbacks. Don't avoid trades because you're afraid of them; instead, accept them as a necessary part of the process. Don't let previous losses make you doubt yourself if you have a competitive advantage. When you win, you win more than when you lose. The Law of Large Numbers is on your side. Think about things probabilistically rather than emotionally. This entails considering the likelihood of something occurring rather than simply assuming it will. This can assist you in making better decisions and avoiding losing trades.
▶️ Confirmation Bias
Taking in only information that supports your points of view. It is tempting to look favorably on your previous conviction because it feels good, but doing so increases the risk of missing important information that could help you get your conviction overturned. You can use objective rules to determine whether your advantage is present. Without proper rules, you will begin to see only what you want to see. To avoid this bias, it is critical to have a statistical advantage and strict rules to adhere to.
▶️ Bandwagon Bias
In general, this means participating in trades that everyone else is doing because you don't want to be left out. FOMO is a term used to describe the latest and hottest trade (Fear of Missing Out). You are succumbing to your emotions and following the crowd rather than following your own well-defined and positive edge. Forget about others and concentrate solely on yourself and your competitive advantage. Everything else is noise.
✅ Conclusion
As you can see, these biases are only temporary. As we've discovered, this is extremely risky for our trading because it's a long-term game in which we let our edge develop gradually. We understand that in order to be successful in trading, we must take the long view and believe in probability. If you succumb to these biases in the short run, you will ruin your trading and your trading account. However, by becoming aware of them, you can take steps to change your frame of reference in the present, preventing these biases from wreaking havoc on your trading performance.
