Saturday, February 18, 2012

Cogent Trading Biases


“Traders tend to believe that a method should be working in all market conditions at all times. When the method doesn’t produce consistent results, the blame usually falls on the method or on the trader (in most cases, the trader blames the method). From there, comes the whole back testing and tweaking process in a tireless attempt to perfect/optimize the method. With each tweak comes a success period and subsequent failure, the trader eventually will conclude the invalidity of the method and move onto another method. This continues until the trader eventually blows out or gives up. This should sound familiar to you because it happens to everyone.” - Jea Yu


Regrettably, profitable trading is an endeavor that goes against human nature, mainly because of these annoying flaws called emotions. Fear and greed compose the actions of the market. You’d need to overcome the wrong trading biases mentioned below if you want to be a permanently victorious trader.

1. People hate losses. In fact, they dread losses more than they cherish returns. They prefer to cut their profits quickly if they’re right and hold onto losers. They feel that a trade in a plus territory may go to a minus territory if they don’t cut it, while thinking that a trade in a minus territory would eventually come back to a plus territory. Some pairs go in our favor by 40 to 50 pips and we truncate them and instead give enough room for losers. This is likened to watering the weeds and uprooting flowers. We tend to be conservative with profits and risky with losses. This would ultimately lead to unwanted results. Please let your winners run.

2. Traders tend to put more emphasis on the last losing streak they went thru more than the last winning streak they went thru. For instance, if a market speculator is using a certain strategy for playing the markets. If the strategy goes thru a period of losses - something normal for all trading strategies under heaven – the market speculator would be more saddened by the last period of losses without remembering a period of winnings she/he had with the strategy in the past. When using a good strategy, we tend to be subjective rather than objective. Because of the past losing period, the market speculator may change her/his trading rules or disregard the subsequent signals generated by the strategy. This would have adverse effect on the strategy results and the general performance of the market speculator. You make no mistake if you lose; you only make a mistake if you don’t follow your trading rules.

3. Traders tend to follow only viewpoints and convictions that tend to support their wrong trading biases. For instance, loss trades that turned positive in the past would reinforce our decision to hold onto losers. The past loss trades that didn’t turn positive would merely be ‘an exception.’ This is detrimental to our long-term survival in the markets, for we tend to ignore warning signs from erroneous trading decisions; making us to be futilely and adamantly optimistic when running losing trades indefinitely.

4. We tend to praise our adeptness when we gain money from the markets, but we blame other people or the markets when we sustain losses from the markets. This is something that can lead to egotistic tendency, thus failing to objectively evaluate the factual reasons behind our success and failure in the markets. There can’t be improvement if you blame others for your problems. You’d need to stop blaming others and take your destiny into your own hands. You need to conquer yourself before you can conquer the markets. Nothing can stop you from improving your trading career if you accept responsibility for your failure and start working towards success. If it’s going to be, it’s up to you.

5. Excessive expectations and recklessness are rampant in the trading world. We tend to overestimate our ability, forgetting that we’re only human. We think we can achieve more positive trading results than we can realistically do. It’s illusory to think we can predict the future movements in the markets. It’s illusory to think that we can control the markets. It’s fallacious to think that we’re superior to other traders or can perform better than them. It’s fallacious to think we can predetermine the amount of profit we want to make on daily, weekly or monthly basis. This is one reason why many traders use big position sizes to attain big profits in a short period of time. They use high risk because they feel they can control the markets and they think the next trades they want to open must go in their forecasted direction. As pleasant as illusions are, they have one disadvantage: They tend to burst like a bubble.

An argument in favor of these biases is that they’re largely what most humans are prone to do and that it’s still possible to make money with them. Although this kind of argument might seem plausible, in reality, it isn’t true. You can only make significant improvement in your trading when you understand these biases and avoid them like a plague.

I’d like to conclude this article with more quotes from Jea Yu:

A. “Some of the most successful traders I know blew out their earlier accounts first. It’s almost a rite of passage amongst the old school traders. The pain and agony they suffered is a constant reminder of what they did wrong. It forced them to reevaluate and re assemble their methods. It allowed them to identify when a bad situation is forming and they are wise enough now to avoid it. I remember reading an interview with a successful fund manager who claimed his success was based on making ‘every’ mistake possible enough times to know not to make them again. Traders don’t have to go this route any more.”

B. “Please note that I am referring to the trading conditions, not the market index gains or losses. A strong or weak market is irrelevant to a trader. A tradeable environment is composed of follow through, trading channels and liquidity. Don’t mistake a market being up huge or down huge as a tradeable market. Sometimes they do overlap but not always. The best litmus test is to take your best setups and see if they play out. If they fail back to back to back, then it tells you the market environment is not fertile. Don’t punish yourself for this. It’s not your fault. The only actions you need to take are to preserve your capital and your confidence levels which means quit for the day.”

NB: Please watch out for my coming articles with these titles: Traits of Successful Traders,’ ‘How the MACD Generates Good Trading Signals,’ ‘A News Trading Strategy,’ ‘Analyze the Markets with the Aroon Indicator,’ ‘A Brief Introduction to Point and Figure Charts,’ ‘Does High Hit Rate Work Always?’ ‘My Typical Trading Day,’ ‘A Trader’s Trick Entry Technique – Sighting Golden Trading Opportunities ,’ ‘Making Money Out of Losses – A Blessing in Disguise,’ ‘Achieve a Better Hit Rate with Gap Trading (Using the Logic Yourself),’ ‘Play the Markets Victoriously with Nano-cent Accounts,’ ‘Why It’s Difficult to Do the Right Things in the Markets,’ ‘How to Identify a Sideways Market – Be Safe!’ ‘A Negative Expectancy System – Pushing Against the Wind?’ ‘Trading Signals,’ ‘An Intraday Moves Catcher – A Wealth Generating System,’ ‘Unlock the Power of Everlasting Triumph in the Markets (Parts 2 - 12),’ ‘How to Handle Uncertainties in the Markets,’ ‘The Issue of Stops (Come Back! Oh Come Back!),’ ‘A Hedge Funds Strategy,’ ‘My Hedge Funds Strategy Update,’ ‘Experiment with Different Exit Tactics,’ ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple Positive Expectancy System – Trading Effortlessly,’ ‘Testimonies from My Subscribers (2),’ ‘Best-case Scenarios – The Beauty of Trading,’ ‘Effective Swing Trading in Forex,’ ‘Gap Trading Revisited,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses - Part 4 (Losses Aren’t Abnormal) ,’ ‘The True Holy Grail – The Long Sought for,’ ‘Forex Trading Vocabulary,’ ‘ Clarifying Some Issues – Part 6,’ ‘Navigating Turbulent Markets – A Double Timeframe Analysis,’ ‘Before You Open that Trade,’ ‘Cogent Trading Biases,’ ‘Overview of My Signals Strategies - Can You Become a Super Trader?’ ‘Winning Trades, Losing Trades,’ ‘The Cost of Discipline,’ ‘Monthly Market Review,’ ‘Uncertainty Has Become My Ally – An Interview with a Dogged Market Speculator,’ ‘I Can’t Express How Grateful I’m to You!’ ‘Yearly Trading Update (2012) – The Big Picture,’ ‘What We’ve Decided to Do in the Markets – Trend Following It Is!’ ‘Annual Trading Results (2012),’ ‘Monthly Trading Report (December 2011),’ etc.

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC


Yahoo! Messenger ID: saazalmu

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