The most terrible thing about trading is not that you have a technical problem, but that you fall into these trading traps without knowing it.
Benjamin Graham, known as the "godfather of Wall Street," once warned market participants: "The main problem for investors, and even the biggest enemy, is probably himself." ”
In daily trading, many people (especially traders who have just entered the market) tend to pay more attention to the learning of some technical indicators or trading strategies, in fact, for a large number of people, the main reason for trading money losses is not in the technical or trading system, but these people unconsciously fell into some psychological traps.
Let's elaborate on the five common psychological pitfalls among traders, avoid them, and believe that your trading will be able to do more with less. That's what he often says to investors.
1
Confirm the bias
Confirmation bias, also known as confirmation bias, is that most people tend to selectively recall and collect favorable details, ignoring unfavorable or contradictory information to support their existing ideas.
Investors with this cognitive bias are more likely to gather confirmatory evidence when making decisions than to evaluate all available information. For example, when a trader prepares to buy an asset, he sometimes draws a conclusion early, and then tries to find information that can prove that his point of view is true, and naturally ignores the information that contradicts his point of view.
In serious cases, when the trade loses, they still refuse to accept the facts, but still frantically look for all the evidence that may support their views. This cognitive bias is common in our daily trading, especially for novices, such as when you are very bullish and decide to go long for gold, you can always find various reasons to convince yourself.
Confirmation bias is likely to be more lethal when investors hold a priori views. If the information does not objectively reflect the full picture of the transaction and falls into a confirmation bias, then it can only strengthen the a priori view. In this sense, we want the information to be unbiased.
2
Gambler fallacy
The gambler's fallacy is the false belief that if something happens more frequently than normal over a certain period of time, then it will happen less frequently in the future (and vice versa).
In investing, the gambler's fallacy means that when a trader has experienced several consecutive losses, he or she mistakenly believes that the probability of winning money on the next trade will be higher. If the outcome of each trade is independent, then the winning percentage of the next trade has nothing to do with the previous consecutive losses (or consecutive profits).
In this case, the right thing to do is to stick to the strategy, rather than to intervene artificially because of the wrong overestimation of probability. In daily trading, many people will have this mentality. When you lose money for consecutive long or short runs, your next trade will subconsciously tend to choose the opposite direction as before.
3
Herd effect
People like to go with the flow because groups have a self-reinforcing mechanism, and if a point of view is repeated within a group, members of that group will gradually accept it.
The herd effect happens every day in the market. Because of information asymmetry, investors speculate on private information by observing the behavior of most people, or rely too much on public opinion to imitate the decisions of others.
The most important factor influencing people's conformity is not the correctness of the information itself but the number of people who agree with it.
The irrational behavior of the individual leads to the irrational manifestation of the collective. Herd behavior indicates that individuals disregard private information and take the same actions as others. Many small whites who have just entered the market like to listen to some analysts shouting orders, which is actually the embodiment of the herd effect in the market.
Some of the more well-known analysts or big vs in the market are often the ones who lead the flock, because ordinary investors have less access to information, when they see that more people choose to believe them, the rest of the people will follow the footsteps of the masses.
For example, the Fed cut interest rates, in fact, there is a herd effect, first there is a group of people out with rhythm, and then more and more people believe that the Fed must cut interest rates. But in reality, the Fed is not so desperate to cut interest rates.
4
Recent deviations
Near-term bias is when people are more inclined to recall and extrapolate recent events, believing that the same will continue indefinitely into the future. This phenomenon often occurs in investments.
In general, human memory is very short, and in terms of investment cycle, memory is particularly short.
During a bull market, people tend to forget about bear markets. People will subconsciously think that the market should continue to rise because it has been rising recently. As a result, investors continue to buy stocks and feel good about their prospects.
Investors have increased their risk exposure and may not consider diversification or prudential approach to portfolio management. Then, after the bear market took a hit, instead of minimizing the losses of its portfolio, investors watched their net value fall sharply, and finally resisted until the market downturn chose to sell.
5
Selective perceptual bias
Selective perception refers to the tendency of people to ignore or quickly forget factors that make us feel unpleasant or contrary to our ideas. To put it simply and crudely, selective perception bias is what we usually call "wearing colored glasses" to see things.
Selective perception bias is dangerous for traders. Because most traders are afraid of the pain caused by losses, they often defend themselves when faced with losses. This makes it very easy for traders to ignore the mistakes they make in trading decisions and instead make some inconsequential excuses.
When the market is good, basically everyone makes money, and people with selective perception bias will mistake the risk return of the market as an additional benefit due to their own ability.
When the market is not good, most people lose money, and people with this deviation often can't see their own problems, thinking that the loss is only a bad market.
Good traders do not blame the market, complain about the environment and any external factors, and traders must take responsibility for their own trading results.