Bias is as natural to us as breathing or eating. Our everyday choices often come with personal judgments—reasonable or not.
Consider how you might choose where to eat, decide on a date, or select a school for your child; all are influenced by some form of bias. In the trading world, these biases can lead you to spot potential trade opportunities. Maybe you catch a headline or hear a rumor, prompting a search for evidence that backs your theory. Pair that with a supportive technical setup, and voilà—a trading idea is born!
Confidence in your biases isn’t just useful—it’s essential for risk management. It takes a certain level of conviction to maintain your strategy when the market deviates from your expectations.
While it’s okay to use biases to scout for setups, blind adherence to them can be detrimental to your trades.
Back in the early 1970s, economist Richard Thaler introduced the “Endowment Effect,” which describes our tendency to place more value on things we own. A famous study showed that students with mugs valued them higher than those who were simply asked the price, illustrating our general aversion to loss.
This tendency to overvalue our possessions extends to our opinions. Whether it’s Mary getting into debates on Facebook or Mark staunchly supporting his views in meetings, we’re all susceptible to it.
However, in trading, unlike business or political discussions, there are definitive right and wrong answers. The market is your judge and jury; just because your hypothesis is compelling, doesn’t mean market movements will align with it.
Flexibility with your trade biases is crucial. You must be prepared for varied scenarios that could impact your trade. If not, ready yourself for potential losses. A few misguided trades are worth it if it means staying in the game for another round.
Not in the habit of adapting your biases? Here are some exercises to consider:
### 1. Review your trade ideas from multiple perspectives.
Start by expanding your research. Although it’s tempting to focus on articles that align with your views, considering information that might challenge them could prove more profitable over time.
### 2. Regularly reassess your biases.
Placing orders is just the beginning. Once a trade triggers, remain vigilant for overlooked variables in your prep stage. This is key in forex markets, where drivers can quickly and dramatically change. Stay updated on news, reassess your charts, and converse with traders who hold opposing views. After each major event, question: “Does this alter my original idea?” If yes, adjust accordingly. Otherwise, you might be speculating rather than trading.
### 3. Keep a trading journal.
A trading journal is a powerful tool for cultivating flexibility. Documenting your trading processes can highlight where your research typically originates, your responses to events that contradict your ideas, and your average gains or losses when failing to adapt your biases.
Remember, biases aren’t the downfall of forex trades. They can, in fact, spark trade ideas. Just don’t anticipate your opinion being the market’s sole answer. It’s when you cling to a bias despite opposing evidence that your trading account might suffer. Always align your trades with what the markets reveal, not just what you think they should be doing.
