PostHeaderIcon Trading With Biases

In trading, there are some ways of thinking that determine a person’s trading decisions. Some of these way of thinking is based on several biases that they believe would increase their chances of profiting from their investments and trading practices. In market analysis, biases based on personal beliefs are used to help determine in which direction a trader plans to tread upon. But unfortunately, a lot of inexperienced traders seem to believe on a set of biases that may prove untrue if used in the field of trading.

Lotto Bias

One of the many biases that traders often use but mistake to be a good method in trading is the "lotto bias". This bias is related to a person’s sense of control. In a lotto ticket, having the opportunity to pick off the right numbers seem to give a person a sense of control over his chances of winning the lottery. The fact is that no matter what the lotto player chooses, he still has that 1 in 13 million chances of getting the numbers right. What choosing the numbers give the person is just a false sense of control.

With the lotto bias at work, a trader can make the mistake of believing that he can make it big in speculative trading just by picking the right numbers. Traders seem to take huge amounts of time trying to find the perfect trading system when in fact the likelihood of profiting from trading is largely dictated by chance. That is why it is important for experienced traders to listen to the markets instead of trying to impose one’s system of trading on the markets.

Representation Bias

A representation bias can be summed up as trying to judge something based on what it looks like rather than the probability of how the markets actually behaves. Traders seem to take some data that seem nonsense and try to make sense out of it, trying to think that it must represent something really essential and important. Representation bias presents a limitation on a person’s ability to be effective in the decision making process. It allows traders to look over what is not seen but may be happening in place of the obvious but that should not be considered as fact.

Conservatism Bias

This bias is based on one’s set of beliefs and personal opinion to determine trading decisions. It can even be considered as being hard-headed. This bias for standing out for what the trader thinks is right instead of what the market is showing can allow traders to make costly mistakes. Conservatism bias prevents a trader from looking at the market from a neutral point of view and with an open mind. Conservatism bias can prevent a trader to change his position when it runs contrary to belief. In trading, this bias makes traders take a look at the market in a way that they expect to see it.


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