Cognitive biases distort trading decisions

Discussion in 'Psychology' started by Trading Education Buyer, Dec 15, 2016.

  1. A cognitive bias refers to a systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion. Individuals create their own "subjective social reality" from their perception of the input

    At the most basic level, people must trade by processing information. Unfortunately, we're not very efficient information processors. We have a lot of biases that enter into trading decisions.Those biases are all about adding complexity to the world.The second area of disadvantage for traders is emotions , stress ,beliefs and personality .These affect trader's performance in real time.

    Is it really that simple?

    Consider the trading rules that work: 1) follow the trend; 2) let your profits run; 3) cut your losses short; and 4) manage your money (i.e. risk) so you can stay in the game. If you design something around following those rules, you'll make a lot of money.


    Current momentum bias as an example , you will override your trading systems due to current momentum.


    Brokers statistics don't lie
    HOLY GRAIL.jpg
    https://www.google.co.uk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=95 of traders lose money



    Despite there being 3,000 free systems /methods ,most traders are not really successful.

    https://www.google.co.uk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=free trading systems



    https://www.elitetrader.com/et/thre...-processing-information-about-a-trade.303149/
     
  2. vanzandt

    vanzandt

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    smallStops likes this.
  3. Traders are like monkeys , they suffer from the MONKEY BIAS, THEY DO MONKEY BUSINESS ON LIVE ACCOUNTS


    Like this?

    Humans are very clever and we get clever , when it is not in our interests .When given a highly profitable system , we second guess systems , because we are smart and smarter than the creator of the system.We are like monkeys and do monkey business on live accounts .It is called self sabotage.


    We are curious and try new things , inventions and do the same in trading.
    We get too clever for our own good in trading ,like these monkeys.

     
  4. vanzandt

    vanzandt

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    lawrence-lugar likes this.
  5. Emotional Bias


    You may notice some overlap between cognitive and emotional bias, but think about this: One reason cited by market watchers for disbelief that the current bull market is unsustainable is a focus on the past. “I purchased a stock and got burned. Why would now be any different?” That’s an example of an emotional bias. Simply put, it is taking actions based on feelings. Here are a few examples:
    • The wall street test
     
  6. There are a lot of trading biases in surf's post

    In an effort to correct the general confusion about Marketsurfer's trading, market and life philosophy, I thought it a wise move to clarify on this thread. This is not a static list and it will be updated and even changed completely over time.


    1. Successful trading takes far more than studying past price, price, volume or any derivative related to past price for the retail trader.

    2. The past does not repeat but it can rhyme with the future but not in a predictive or consistently profitable manner.

    3. Luck is a tremendously powerful force that can be used for both success and failure in the stock market

    4. Embrace randomness in life. it is a sure way to find success

    5. Price charts are extremely deceptive and should only be used for descriptive or illustrative purposes-- for this they are perfect.

    6. Beware of Technical analysis. It is very seductive due to the way we are wired. It is only effective for describing what has happened or explaining concepts to investors who prefer pictures.

    7. Look for causes, not effects when attempting to make trading decisions.

    8. Price is the effect, not the cause of every move therefore "price action" and other price based methods are fatally flawed from the start.

    9. Beware of anyone who says the same method has been profitable for a number of market cycles, who uses scientific words without support, who makes claims based on fatally flawed premises.

    10. Trade what you think based on research into cause, not what you see as the market is designed to deceive.

    To be continued.....

    surf

     
  7. zdreg

    zdreg

  8. toc

    toc

    A good trade is where you stuck to your plans. Does not mean if you won or lost on that trade.
     
  9. A good trader knows his psychology and has a mental edge , he knows why he is doing the good trades and executing them perfectly , but most fail due to the human mind .

    A few good trades , and other mismanaged trades does not make a good trader.
     
  10.  
    #10     Dec 18, 2016