Want To Be A Successful Trader? Know Your Cognitive Biases

You are your own worst enemy when trading or investing in the markets.

Humans, in general, aren’t naturally wired to be good at assessing, and taking risks. A lot of this has to do with cognitive biases, which affect the ways in which we think and make decisions, often in very sneaky and insidious ways.

If you want to be a successful trader or investor, you will need to know what these biases are, how they affect you, and what steps you can take to mitigate them.

What You Need To Know About The Anchoring Bias & Trading

Our thought processes are notoriously riddled with cognitive biases. Which means that when we peer into our respective crystal balls to forecast the future, we only end up seeing a reflection of ourselves – what we want to see.

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What You Need to Know About The Outcome Bias & Trading

Cognitive biases can negatively affect our decision making, especially when it comes to trading and investing

Our minds are clouded by the outcome bias when we are overly focused on the results of our actions, as opposed to the decision making process which led to them.

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What You Need to Know About Loss Aversion & Trading 1

The human mind is, generally speaking, inclined to prefer not losing, rather than winning. For some reason, psychologically, we are wired to feel the pain of loss more keenly than the joy of gain. Needless to say, this natural aversion to loss can have an outsized impact on our ability to trade the markets effectively.

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What You Need to Know About Loss Aversion & Trading 2

Humans are, generally, speaking, more inclined to prefer NOT losing, rather than winning

How can loss aversion prevent us from taking profitable trades? Here’s an example that most traders can probably relate to.

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What You Need to Know About Loss Aversion & Trading 3

Humans are, generally, speaking, more inclined to prefer NOT losing, rather than winning

Another example of loss aversion causing us to act against ourselves is when it prevents us from crystallizing losses when our positions turn against us.

Returning to our hypothetical trader and his position in Apple, loss aversion creeps into his decision making process when he has to decide whether or not to close out his position after it turns against him.

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