Trading psychology can help traders recognize when they are mistakenly holding on to a bias in their trading. A bias can be very detrimental to trading, causing poorly positioned trades and missed opportunities. It can trigger mental and emotional events that raise stress levels and can turn any situation from not-so-good to terrible in an instant.
Smart people and denial
Sometimes even very smart people can deny it. Several years ago I went with a group to Atlantic City, NJ to watch a friend run a marathon. Except for me, my friends were all Harvard graduates. They were definitely smart. I had a great time driving to Atlantic City with these smart people.
When we arrived, we started looking for the Hotel Flamingo where we had reservations for the night. Oddly, though, we were having a hard time locating our position on the road map (this was before GPS navigators). None of the streets matched our map. So we went a little further, thinking that soon we would identify a street and our location.
After about a half hour of driving aimlessly, someone cheered as we rounded the corner and saw the Flamingo Hotel. Problem solved, we think. Not quite. This hotel was on a different street than the one indicated on our reservation card. How could this be? One of the Harvard graduates had a solution. “There must be two Flamingo hotels in this town,” he said. Yes of course.
using the wrong map
It turned out that the marathon was not in Atlantic City but in Asbury Park, a coastal town an hour north of Atlantic City. My smart friend never checked the race material, he just assumed the marathon was in Atlantic City. So confident in this belief that he made us all deny what any objective observer could clearly see: our map was not a street map of Atlantic City, but of Asbury Park!
It’s easy to have an idea and stick with it tenaciously even when the evidence says otherwise. Traders are subject to it every day. Maintaining a bias is like using the wrong road map to navigate. You just spin your wheels.
To do
So how can traders help themselves know when their bias is wrong? The best way to avoid holding onto a bias is to anticipate it.
Let’s say you want to be a buyer in tomorrow’s market. That’s great; You want to look for buying opportunities and you need to map out where those opportunities are likely to develop. But you also need to build flexibility into your roadmap for tomorrow. Anticipate that the market can go either way. Anticipate in advance what it would look like if the market did not recover tomorrow. What would it look like if your bullish bias turns out to be wrong? What would tell you that the market is drifting and that you should stay out? And where would you find a short trade if the market starts to sell off?
Trading psychology helps you develop mental flexibility and allows for a broader range of responses to the market, not just a one-sided bias. Anticipating various scenarios is one of the trading psychology skills that traders can develop to stay flexible and avoid being locked into one direction of the market.