What Connects 9/11, Brains, & Trading? Why’s It Important? 2
The converse is also true of the availability bias during times of market stress.
A constant flow of negative headlines during market meltdowns makes traders more inclined to make bearish bets, and to forecast more doom and gloom.
2008 and 2020 are good examples of this, where everyday brought a new round of headlines that were just plain depressing to read.
11. Availability Bias
The way to recognize that we are in such an environment is to be cognizant of the language employed by journalists and analysts.
Words like “apocalypse”, “collapse” and “armageddon” will appear more often, even in news outlets that normally shy away from using them.
When these words start popping up all over the place, it is more often than not a good idea to start paying more attention to whether or not your availability bias is causing you to take on an overly bearish view.
Like the confirmation bias, the availability bias affects traders before they put on a position, which makes its negative effects difficult to mitigate.
However, that isn’t to say that we cannot guard ourselves against it.
The simplest mitigation strategy is to employ a stop loss on all your trades (if you aren’t already doing so).
Of course, these stop losses should be part of a broader risk management framework that you’ve developed as part of your trading plan. This would ensure that losses from trades that might have been entered into because of availability bias will be kept small and not blow up your account should markets run counter to your position.
Another mitigation strategy is to filter out the news, or simply avoid reading too much of it.
This is, however, easier said than done since a fine balance has to be struck between keeping abreast of the latest developments and being overly influenced by the sentiment expressed in headlines.
Doing so is especially important during times of extreme sentiment, as journalists, authors, and analysts writing about market developments tend to express their own availability bias in their work.
As these headlines and the sentiment they evoke proliferate, more and more people succumb to their availability bias, creating a self-reinforcing cycle – the bandwagon effect.
A third method of guarding against the availability bias is to take the human mind, and all its cognitive biases, out of the equation altogether. This means not trading based on a personal view of markets, instead focusing solely on price movements.
This can be in the form of any trading strategy that bases entries and exits on technical indicators (or technical analysis), whether discretionary or mechanical.
However, such an approach is relatively less popular than trading based on a fundamental view, and requires learning a new set of skills and ways of thinking that some traders may not be open to.
That is not to say that trading in such a way cannot, or will not be profitable, because it can, and has been used successfully for many years.
At the end of the day, like any trading plan, how you choose to guard yourself against the availability bias has to be tailored to your own personal preferences, interests, and perspectives.
When you finally find something that works for you, stick with it!
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