Which type of trader are you?

Most traders fall into a particular kind or multiple categories. It's hard for an individual to overcome all these but that include lot of research and learning to write off some of these.

http://rationalwiki.org/wiki/List_of_cognitive_biases


http://io9.com/59744

Well that's quite a list. I would definitely have some of these but at a quick look, I surely have the Gambler's Fallacy.
That's why I'm a counter trend trader and why I love oscillators more than moving averages

Cognitive Biases

I saw this thread the minute you posted it and thought to myself, "No one is going to pay attention to this thread because a thread that is very crucial to one's trading development doesn't really catches a lot of attention." ... 11hrs later and only one response

There are actually a lot more cognitive biases (which relates to trading) not listed on that wiki list. And one of the most crucial point in trading (which is never/hardly discussed) is being aware of your cognitive biases, consciously experiencing it, and consciously overcoming them in trading. Once you come to understand these (your) cognitive biases, it will take your trading to a whole new level.

Here are some of the things/benefits that you may not be aware of:

1. It improves your research and learning curve
2. It makes it easy to find and correct your trading mistakes
3. It makes you more rational and not delusional
4. It has great benefits if added to your trading plan, trading strategy or trading system
5. etc... etc... etc...

Example:
Whenever I hear (or read) someone that they want to make X amount of money in trading, I already know it is a lost cause because they don't understand the cognitive biases going on in their head. Don't get me wrong, I'm not shooting down people's dream. This is the typical approach (cognitive bias) when it comes to trading: " I want to make $1M".... or..... "I want to provide for my family (this is another cognitive bias that doesn't help your trading)".

Cognitive Bias: "I want to make $1M"
Question: What do you do when you have a big project to do?
Answer: 90% of the time you procrastinate because the task is overwhelming. You are not aware of this, and you end up watching youtube or wasting your time doing something else and not what you're suppose to be doing. You're setting yourself up for failure and self sabotage.

Don't focus on $1M... Instead, focus on the execution of your trading plan/system. If you focus on $1M, you will hold onto losing trades expecting them to turn around and then you get a margin call. Why don't you close your trades? because you procrastinate. When you do you close your trades? when the pain is so big and unbearable (big loss) you take action and then you close your trades. And if you're highly motivated (and you're not in the procrastinating group), several cognitive biases kicks in also. Again, setting yourself up for failure and self sabotage. You don't believe to what I just told you? it's called denial (another cognitive bias). There is a lot of research regarding goal setting and goal achievements. You'd be surprised that what you read in your typical Personal development books, research validates the opposite is true. Saying mantras or affirmations that you will make $1M or that you are a success did not perform well compared to people who acknowledge their limitations and fixing them. The moment you think about your millions, you've put the odds against yourself.

I've been profitable since 2006 and right up to date 2015. And since I was aware of such cognitive biases, it lingered in the back of my mind (until 2012) if whether I am an objectively profitable trader or am I just having a lucky streak. Anyone who's been profitable for 9 years would be easily swayed to think that they are objectively profitable and simply not lucky (due to cognitive biases), but not me. That is another story (searching for objectivity).


Peace,
CrucialPoint

thanks CP

It would seem to me that there is a danger here of traders spending massive amounts of time searching for the tiny flaws in their personality and chasing new ideas etc.
I would agree that focusing on the 1 million goal is futile. If one has a plan that is reasonable and that others have already achieved then there is no rational reason why anyone else with a reasonable state of mind cannot duplicate that plan for oneself.
The challenge is, does the individual have the same quiet tenacity discipline focus belief to carry out the plan?
We humans are very complex. Personally I know that if I get up in the morning and stick to my routine that has proved successful for others, it is for me also.
Like any other task in life if one does not do it it will not work
That is the key. And we all have this weakness where we do all sorts of silly things rather than just do the damn plan exactly!
If I follow my plan I get positive results end of!
Happy trading

Hi CP,
how can I deepen the bias?

Haha.. thank you for highlighting me as the only trader out there who actually pays attention to crucial threads

Bro, appreciate your time for your input and elaboration, as always you write well and your posts are always entertaining. Trading consist an arsenal of skills and knowledge which most of us overlook when we started out trading. Hope these will help anyone further improve their trading journey .

one finger trader

I bet over 90% are "bandwagon"

Yes true, though trading for a long time, I still fall into this some time.

Eg, when everyone was shorting EU, I close my bottom Long too early because everyone keep screaming sell. Then after FOMC, I closed my long, and I short on top, and this time, I stay away from forums to avoid getting influence. Human tends to subconsciously or indirectly take into others' analysis or views which affect our own trading plan.

"All the work I ever did was just what I needed to do to get what I wanted. Since I always had the prerogative to not strive for what I wanted, I never felt forced to do anything,” Ray Dalio

Critical Thinking vs Cognitive Bias: The Game is Rigged :nerd:




Peace,
CrucialPoint

I actually like to observe the forum because it gives me an idea of the bias of a small portion of the stakeholders looking at the market. That said, I like it because looking at the chart if I'm seeing signals opposite to the bias of the forum's members often we're in for a rollercoaster ride in the direction opposite to the majority's opinion.

But with that in mind actually all of us have all the biases above because they're part of human nature. You can't NOT have these biases, you can only be aware of them.

The list is too long and my time is too short to do it for all the biases in the article but the most troubling decision-making and behavioural biases in trading (and therefore the ones we need to be especially attentive towards) are:

 

1. Confirmation bias the tendency to search for or interpret information in a way that confirms one's preconceptions.
2. Contrast effect the enhancement or diminishment of a weight or other measurement when compared with recently observed contrasting object.
3. Endowment effect "the fact that people often demand much more to give up an object than they would be willing to pay to acquire it".[2]
4. Extreme aversion most people will go to great lengths to avoid extremes. People are more likely to choose an option if it is the intermediate choice.
5. Focusing effect prediction bias occurring when people place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome.
6. Hyperbolic discounting the tendency for people to have a stronger preference for more immediate payoffs relative to later payoffs, the closer to the present both payoffs are.
7. Illusion of control the tendency for human beings to believe they can control or at least influence outcomes that they clearly cannot.
8. Information bias the tendency to seek information even when it cannot affect action.
9. Irrational escalation the tendency to make irrational decisions based upon rational decisions in the past or to justify actions already taken.
10. Loss aversion "the disutility of giving up an object is greater than the utility associated with acquiring it"
11. Neglect of probability the tendency to completely disregard probability when making a decision under uncertainty.
12. Outcome bias the tendency to judge a decision by its eventual outcome instead of based on the quality of the decision at the time it was made.
13. Post-purchase rationalization the tendency to persuade oneself through rational argument that a purchase was a good value.
14. Pseudocertainty effect the tendency to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes.
15. Selective perception the tendency for expectations to affect perception.

For more on this topic I recommend the light read below. Short sentences, to the point examples, and a focused presentation of 48 cognitive biases

http://www.amazon.com/You-Are-Not-So...e+not+so+smart

Hi all
i am a do da da trader
all have a nice day

Hi just wondering what does your routine consist of??

The list is too long, so what category is that? From what I saw until I got bored, I would say I am congruent.

In reference to crucial point's novel, I would say that a money goal is a natural inclination, but dreadfully wrong. It creates too much anxiety and then if you miss a goal, it brings guilt and shame, which leads to ignoring trading to prevent further humiliation.

My advice is to build your system until it produces profit daily. Then convert your money target into an activity target. Just like everything else in life, Actions Speak Louder Than Words! The guy that actually buys the flowers get the rewards, not the guy who says "I thought about it". Convert your money target to an action target. Win or lose, you will pull the trigger today and get whatever the market is willing to give. If I lose over X amount, I will stop trading for the day. If I do not lose it, I will keep trading until my trading day ends. This takes the pressure off you to make any predetermined amount of money. Instead, you are merely showing up, and playing/working. It is completely illogical to set a money amount on a random event. Your heart knows it is illogical, and that is why it creates all those emotions. So, stop doing it!

Thanks for sharing, it is always good to understand ourselves better and identify which type we are . Cheers

Well you can consider me as an Arbitrage trader. I use to purchase and sell assets simultaneously for earning profit from price differences of identical or similar financial instruments, on different markets.

Peripeteia & Anagnorisis

 

1. Peripeteia is a sudden change or unexpected reversal of circumstances or situation. (the turning point, or the crucial point)
2. Anagnorisis is a change from ignorance to knowledge. (Usually due to Peripeteia)

What is the cognitive bias here?
It is the sense of complacency to what you have been told about trading. And to challenge this complacency on a conscious level (rather than a random event of occurrence) that will lead to Peripeteia and to Anagnorisis.

If you don't challenge this complacency, your cognitive bias will keep you at your comfortable and complacent state.

The biggest example in trading is our bias towards certainty and uncertainty. Our brain dislike uncertainty and is very stressful to our mental state. Thus, the brain creates a safety mechanism in any way or form to relieve/release this stress. Our brain will go as far as lying and deceiving our self in order to protect it. Our brain craves the familiar, it feels better when things are certain.

Thus, drawing lines and looking at past history to foretell the future gives you safety, comfort and certainty. But the notion and the idea of "past history is no indicative of future event" or "the future is unpredictable and uncertain" is very stressful to the brain. Despite the objective reality, you lie to yourself to make you feel better. To break this cognitive bias is very hard, depending also on how long you've been brainwashed. Because the neuron pathway in your brain has been wired over the length of repetitions of lies. You draw lines and shapes and patterns to foretell the future so that you simply feel good, feel safe, feel comfortable, feel certain.

Going back and mastering the basics: There are only 2 things that can happen with a trendline (or any line) >>> it will either break out or it will bounce of it. The probability is 50% (minus the spread). If either one occurs more than the other, price will continue to go in one direction.

Will it bounce or will it break?




Will it be dependent on the upcoming news release?




Do you really need to know the past?




Where are the unicorn patterns?




The answers are elsewhere to be found


Peace,
CrucialPoint