By Christopher Inks (my trading mentor!)
Your biggest enemy in the markets is not Wall Street, or whales, or even the multitude of successful traders out there – it is you. Plain and simple. Most retail traders spend all of their time jumping from system to system, exerting little effort to actually understand and apply them properly and consistently, rather than work on the one thing that will have a greater impact on their trading than anything else. I am talking about their biases. These include overconfidence, confirmation, anchoring, and loss aversion.
Overconfidence Bias – thinking you know everything you need to know or can learn it overnight. This is a problem because it tends to lead to overtrading. Worse yet, it can result in a trader taking too large of a trade with the belief that it will make them significantly wealthier. The reality is that the trader most often trades in and out of their trades until there is no profit left, and that is only if they took a positive trade. More times then not they will end up losing money because the trade was not worth taking in the first place.
Confirmation Bias – only paying attention to, or purposefully seeking out, the information that supports the beliefs you currently hold. Unfortunately, this leaves you vulnerable to missing the big, red warning signs that things are not going the way you believed they would. In missing those signs, traders end up losing money repeatedly as they find themselves fighting the market’s trend.
Anchoring Bias – this is the kiss of death for trend traders. It is the belief that the future will continue to look like the present. In other words, they fail to recognize that a trend is coming to an end. So, they continue to buy a declining price or sell a rising price causing them to add to their losses with each trade. Recently, we have seen this in the stock market, gold, and silver, as well as the dollar.
Loss Aversion Bias – this is one I love to discuss because traders have the most difficulty overcoming it. This refers to the idea that pain is felt greater than greed. As such, traders are reluctant to cut lose a losing trade. So, they end up holding on to it and turning a short-term loss into a much larger, longer-term loss that can decimate their portfolio.
Now that you know what they are, how do you overcome them? The truth is, it is always easier said than done. But it can be done. To do so, you must, first, be honest with yourself – acknowledge that you are doing it. Only after you do so can you take the steps required to overcome your biases.
After you have been truthful with yourself about your biases, you should start by establishing a risk management plan. You need to keep your losses at 1% or less of your portfolio. By adhering to this, you will be forced to plan out your stop loss and exit BEFORE you enter your trade. This means no mental stop losses as they most often lead to a person ignoring the mental stop loss and, instead, emotionally rationalizing why they should not exit the trade at that point. Remember, nothing done emotionally in the market turns out positive on a consistent basis. Also, when planning your trade, make sure you are looking at multiple time frames. Traders often just stare at the 15-minute of 1-hour charts that they are attempting to trade, oblivious to the overall trend and impending warning signs that the trend may be nearing an end. By paying attention to the larger, and smaller, time frames as well traders are better able to prepare themselves for the possibility of a reversal. And being aware of a possible reversal means that traders will be less likely to hold onto the position as price moves against them thereby locking in greater profit or reducing their loss.
Want to know more about how to effectively deal with your biases and turn your trading into a consistently profitable venture rather than continuing to rack up losses? While you are at it, every Wednesday you can join in on our live training and learn all the little tips, tricks, and techniques that can make you profitable from day one, without any previous market experience, while you’re learning how and why the markets move like they do. I have put together a special deal for Scott’s community. You can receive 50% off your first month of Tier 3 access at TexasWest Capital, the industry’s leading trader education and market forecasting service. Follow this link: https://howtotradetowin.com/?coupon-code=WolfsDen50%off and then purchase 1 month of Tier 3 access. The discount will be applied automatically.
This coupon code is only valid for new members. If you were a previous member of TWC and would like to join again, please send me an email directly at christopher.inks@texaswestcapital.com and I will be happy to send you the same discount as well.