11 Biases That Affect Traders

By | November 28, 2013

Overconfidence
As the name suggested, it is the irrational faith in one’s skills, methodology or beliefs. For example, you see a certain chart pattern and make a maximum leveraged trade, even though you understand that any chart pattern cannot predict market with certainty. Trading excessively after a winning streak also shows overconfidence.

Cognitive Dissonance
It means finding excuses for something which makes you ‘uncomfortable’. For example, jumping from one indicator to another when you face losing trades; or continuing to trade in stock even your trading methodology does not gives you a positive expectancy.

Availability Bias
It means being biased to information which is readily and easily available. For example, people begin to trade using RSI without understanding the internal relative strength; that is, RSI is most talked about on forums so start using them without rationally researching it. Being affected from attractive advertisement or intelligent sounding articles (including this one!) without due diligence also signifies availability bias.

Self-Attribution Bias
It means giving yourself unwarranted praise for outcomes which may just be an outcome of chance. For example, people make money in a bull market through buy and hold and start begin to believe on their trading acumen rather than the market regime which favors their trading style.

Conservatism Bias

It makes people cling to a forecast or view- also results in herd behavior. It’s not just about buying when everyone else is buying; a good example is using the indicators which are most talked about on internet.

Self-Control Bias
It means taking short-term decisions against what you understand rational and which conflict with your goal. For example, you finalize a watchlist of stocks and decide to stick with it. However, you may get tempted to trade a ‘hot’ stock.

Optimism Bias
It means painting a rosy picture for yourself even when common sense does not approves. For example, making 2K a month through full-time trading and congratulating yourself; or neglecting proper trading costs in your backtested strategies.

Confirmation Bias
It means to seek out only information that confirms their beliefs about a trade that they have made and to not seek out information that may contradict their beliefs. For example, marking only bullish chart patterns once you have bough a stock.

Loss Aversion Bias
It means trying to comfort yourself emotionally by not accepting your losses or mistakes. For example, widening your stop loss in losing trades or selling winners too early.

Recency Bias
It means giving undue weightage to recent information. For example, buying stocks because of sudden dip in gold or extrapolating a price pattern.

Regret Aversion Bias
It means undue avoiding of situations which can make you regret (being too conservative). For example, not trying unconventional trading strategies or stocking to a group of stocks for too long.

One thought on “11 Biases That Affect Traders

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