Cognitive biases in trading: how they affect me and how I deal with them
What I discovered when I let my mind play tricks on me
At the beginning of my career as a trader, I believed that technical analysis and strategies were enough to be successful. However, I soon realized that my biggest obstacle was not the market, but my own mind. Cognitive biases, those mental shortcuts that allow us to make quick decisions but often lead us down the wrong path, were sabotaging my trades.
The biases that affect me the most
Confirmation bias
This bias led me to seek out information that supported my pre-existing beliefs and to ignore data that contradicted them. For example, if I believed that a stock was going to rise, I only looked for positive news about it and dismissed the negative news.
Loss aversion
I felt the pain of a loss twice as strongly as the satisfaction of an equivalent gain. This led me to hold on to losing positions in the hope that they would recover, rather than cutting my losses in time.
Overconfidence
After a few successful trades, I overestimated my abilities and took unnecessary risks. This overconfidence led me to trade with larger position sizes than my strategy allowed.
Anchoring
I clung to specific prices or levels as references, even when the market had already changed direction. This anchoring prevented me from adapting to new market conditions.
Availability bias
I gave more weight to recent or easily remembered information, such as shocking news, without considering the full context or historical data.
Strategies I implemented to mitigate these biases
Establish clear rules and follow them
I defined specific parameters for each trade: entry and exit levels, position size, and stop-loss. This helped me make decisions based on data rather than emotions
Perform backtesting
I tested my strategies with historical data to evaluate their effectiveness before applying them in real time. This gave me confidence in my methods and reduced the influence of biases such as confirmation bias.
Keeping a trading journa
I wrote down my thoughts, emotions, and decisions during each trade. Reviewing this journal allowed me to identify patterns of behavior influenced by biases and correct them.
Practice self-awareness
I trained myself to recognize when my emotions were influencing my decisions. By being aware of my emotional states, I was able to take a step back and assess the situation objectively.
Seek feedback
I shared my analyses and trades with other traders to get different perspectives. This helped me challenge my beliefs and identify potential biases in my reasoning.
Results of confronting my biases
By implementing these strategies, I noticed a significant improvement in my performance. My decisions became more rational and less impulsive. Although the biases never completely disappeared, I learned to recognize them and manage them effectively.
Conclusion
Cognitive biases are a natural part of human decision-making, but in trading they can be detrimental. By being aware of them and by applying strategies to mitigate them, I can operate more effectively and with greater confidence. Recognizing that my mind can be my worst enemy was the first step toward becoming a more disciplined and successful trader.
