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.

Are You A Victim Of The Recency Bias When Trading? Part 2

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

Both doubt and psychological distress are part of our hypothetical trader’s reality.

In struggling with the despair of coming down from the high of a six month winning streak by posting nothing but losses for a month, she is unable to take a mental step back and assess her situation without panicking about something being direly wrong.

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Are You A Trader Who’s Victim To The Bandwagon Effect? 1

People believe in something simply because other people believe in them.

Which really is another way of saying that market participants (and people in general), have a strong tendency to engage in herd behavior, also known as the bandwagon effect.

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Are You A Trader Who’s Victim To The Bandwagon Effect? 2

Traders have a tendency to engage in herd behavior, or the bandwagon effect, often with disastrous consequences

Financial history quite clearly demonstrates our human disposition towards herd behavior in financial markets, and the disastrous consequences which inevitably follow.

Why then do so many traders remain blind to the bandwagon effect?

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Is Hindsight Stopping You From Becoming A Successful Trader?

Hindsight is 20 20, and really doesn't help your trading.

Hindsight is 20/20.

You’ve probably heard this phrase at some point or other in your life, and it refers to the clarity that comes with retrospection, which isn’t available to you at the point of making a decision.

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Have You Been Fooled By The Law Of Small Numbers?

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

Everyone has heard of the law of large numbers, but what about the law of small numbers?

In truth, there isn’t really such a law.

The turn of phrase is simply used as a parody of the actual law (of large numbers) to illustrate that humans tend to draw firm conclusions from small samples – to their detriment.

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