Mastering Forex Trading Psychology - Part 2
09.03.2020
While trading the financial markets, traders are confronted with a plethora of challenges. Therefore, a clear mind is the most powerful tool they can possess. However, personal predispositions or biases - the general patterns that our brains follow to make the decision making faster - can affect the way they trade.
Availability Bias
Inaccurate trading information that comes from other traders or stems from your own trading experience can affect your trading. For example, when you hear about how another trader who tested a new trading strategy has failed to have results, or if you go through a similar experience, your mind as a trader is tricked into immediately assuming that the trading strategy is ineffective. However, you base your assumptions on limited sources of data. To avoid the risk of disregarding effective trading techniques, ensure that you check statistics and facts based on a larger number of data.
Representative bias
Oftentimes traders tend to repeat trades solely because they proved to be effective and resulted in earnings in the past. This is a risky practice as similarity of trades does not guarantee effectiveness and the lack of adequate market analysis could lead to the draining of your account. You should remind yourselves that your every move in the financial markets should be guided by meticulous study and not your mind’s tendency to believe that effective trading history will repeat itself.
Negativity bias
Sometimes, traders may focus on the negative side of trades, fixating on everything that went wrong and overlooking everything they did right. These are the effects of the negativity bias on traders’ minds, forcing them to emphasize on the negative aspect of their trading practices. Traders should be alert and quick to recognise these symptoms before abandoning trading strategies, which if slightly adjusted could result in financial gains.
Status Quo Bias
When traders maintain the status quo of their trading, they stick to the trading strategies they have used and tested multiple times and they are reluctant to experiment with new ones. However, when traders find themselves in this position, they should not indulge in their mind’s tendency to remain in its comfort zone as their current strategies may have been rendered outdated by the current conditions of the financial markets.
Confirmation Bias
Traders display signs of confirmation bias when they do not take into consideration information which cancels out their trading beliefs and simultaneously overvalue facts that confirm them. For example, they may not pay attention to market news which indicate that their market analysis is wrong, while they enthusiastically embrace news that show that their market forecast will prove to be correct. Demonstrating this kind of bias can have negative effects for traders as it leaves them vulnerable in highly volatile markets that constantly shift. Having an unbiased view of the markets is an absolute necessity for every trader.
The maturity of chances fallacy
When traders wrongly believe that a trading instrument which has been on the rise will keep increasing, they display symptoms of the Gambler's fallacy (also known as the maturity of chances fallacy). You should refrain from indulging into this kind of reasoning as it is not based on logic. In highly volatile trading markets, there is absolutely no guarantee that an increasing trading instrument will maintain its rising status and by following this line of thought your trading account could suffer detrimental consequences.
How to overcome trading biases
As a trader, the key to overcoming your trading biases is to be honest with yourself and open to self-scrutiny. Going through the trading biases list, you were probably able to see yourself in some of the aforementioned situations. The first step to mastering trading psychology is to identify your biases. Only then, will you be aware of your tendencies and able to consciously avoid repeating any past mistakes you have made in the financial markets. Our mind is a powerful tool and by steering clear of negative trading habits can help you open up to the possibility of implementing positive ones. Thus, you can enter the markets with a more rational mindset that could advance your trading and help you make the most out of the exciting trading opportunities offered to you by Finior Capital.
