BIASES THAT EXPLAIN WHY TRADERS LOSE MONEY
Updated
Hello traders, today we will talk about WHY TRADERS LOSE MONEY
BIAS
WHAT IT MEANS…
HOW IT INFLUENCES TRADERS
Availability People estimate the likelihood of an event based on how easily it can be recalled. Traders put too much emphasis on their most recent trades and let recent results interfere with their trading decisions.
After a loss, traders often get scared or try to get back to break even. Both mental states lead to bad trading quickly.
After a win, many traders get over-confident and trade loosely.
You must be aware of how you react to recent results and trade with a high level of awareness.
Dilution effect Irrelevant data weakens other more relevant data. Using too many tools and trading concepts to analyze price could weaken the importance of the core decision drivers.
I wrote about redundant signals and how to combine the right tools here: click here
Gambler’s fallacy People believe that probabilities have to even each other out in the short term. Traders misinterpret randomness and believe that after three losing trades, a winning trade is more likely. The probabilities don’t change based on past results.
Even after 10 losses in a row, the next trade does not have a higher chance of being a winner.
Anchoring Overestimating the importance of the first available piece of information. Upon entering a trade, people set their whole chart and analysis in reference to their entry price and don’t see the whole picture objectively anymore.
You must always have a plan BEFORE you enter a trade.
Insensitivity to sample size Underestimating the variance for large and small sample sizes. Traders too often make assumptions about the accuracy of their system based on just a few trades, or even change parameters after only a few losers.
A decent sample size is 30 – 50 trades. Do not alter anything about your approach before you have reached this number. And make sure that you follow the same rules to get an accurate picture of your trading within the sample size.
Contagion heuristic Avoiding contact with objects people see as “contaminated” by previous contact. Traders avoid markets/instruments after having a large loss in that instrument, even when the loss was the fault of the trader.
Hindsight We see things that have already occurred as more probable than they were before they took place. Looking back on your trades and fishing for explanations why the trade has failed, even though those signals weren’t obvious at the time.
Do not change your indicator or setting after a loss to come up with explanations or excuses. Accept that losses are normal and always follow your plan.
Hot-hand fallacy After a successful outcome on a random event, another success is more likely. Traders believe that once they are in a winning streak, things become easier and they can “feel” what the market is going to do next.
I wrote about the hot-dand-fallacy in trading before: click here
Peak–end rule People judge an event based on how they felt at the peak of the event. Traders look at a losing trade and only see how much they were in profit at the maximum, but don’t look at what went wrong afterwards.
Do not change your reference point when in a trade and have a plan for your trade management and when to exit before entering a trade.
Simulation heuristic People feel more regret if they miss an event only by a little. Price that missed your target only by a little bit, or a trade where you got stopped out just by a few points can be more painful than other trades.
The outcome is out of your control and you cannot influence the price movements. The only thing you can do is manage your trade within your rules.
Social proof If unsure what to do, people look for what other people did. Traders too often ask for advice from other traders when they are not sure what to do – even when other traders have a completely different trading strategy.
You must take responsibility for your actions and results. And not rely on someone else.
Framing People make decisions based on how it is presented; a gain is more valuable than a loss and a sure gain is more valuable than a probabilistic greater gain. Traders close profitable trades too early because they value current profits more than a potentially larger profit in the future.
Cutting winners too soon is a huge problem. If this is an issue for you, reducing screen time can be helpful. Do not watch your trades tick by tick.
Sunk cost We will invest in something just because we have already invested in it. before Adding to losing trades because you are already invested, even though no objective reason to add exists.
You must define your stop loss in advance and then execute it without hesitation when it has been reached.
Confirmation Only looking for information that confirms your beliefs, ideas and actions. Blanking out reasons and signals that don’t support your trade and just looking for confirmation.
Especially when traders are in a loss, they only look for supportive information. Stay objective!
Overconfidence People have a higher confidence than what their level of skill actually suggests. Traders misjudge their level of expertise and skill. Consistently losing traders don’t see that it’s their fault.
Analyze your results objectively and get a trading journal to add even more accountability.
Selective perception Forgetting those things that caused discomfort. Traders forget easily that their own mistakes and wrong trading decisions caused the majority of their losses.
Do not blame the marjets, unfair circumnstances, your broker or any other outside event. You are the one who is responsible for making it work. It’s totally up to you and blaming others won’t help you make progress.
Which bias is the one that is causing you the greatest troubles? What are you workin on right now? Let me know in the comments below and I will answer with tips and ideas on how to overcome your struggles.
This chart is just for information
Never stop learning
I would also love to know your charts and views in the comment section.
Thank you
BIAS
WHAT IT MEANS…
HOW IT INFLUENCES TRADERS
Availability People estimate the likelihood of an event based on how easily it can be recalled. Traders put too much emphasis on their most recent trades and let recent results interfere with their trading decisions.
After a loss, traders often get scared or try to get back to break even. Both mental states lead to bad trading quickly.
After a win, many traders get over-confident and trade loosely.
You must be aware of how you react to recent results and trade with a high level of awareness.
Dilution effect Irrelevant data weakens other more relevant data. Using too many tools and trading concepts to analyze price could weaken the importance of the core decision drivers.
I wrote about redundant signals and how to combine the right tools here: click here
Gambler’s fallacy People believe that probabilities have to even each other out in the short term. Traders misinterpret randomness and believe that after three losing trades, a winning trade is more likely. The probabilities don’t change based on past results.
Even after 10 losses in a row, the next trade does not have a higher chance of being a winner.
Anchoring Overestimating the importance of the first available piece of information. Upon entering a trade, people set their whole chart and analysis in reference to their entry price and don’t see the whole picture objectively anymore.
You must always have a plan BEFORE you enter a trade.
Insensitivity to sample size Underestimating the variance for large and small sample sizes. Traders too often make assumptions about the accuracy of their system based on just a few trades, or even change parameters after only a few losers.
A decent sample size is 30 – 50 trades. Do not alter anything about your approach before you have reached this number. And make sure that you follow the same rules to get an accurate picture of your trading within the sample size.
Contagion heuristic Avoiding contact with objects people see as “contaminated” by previous contact. Traders avoid markets/instruments after having a large loss in that instrument, even when the loss was the fault of the trader.
Hindsight We see things that have already occurred as more probable than they were before they took place. Looking back on your trades and fishing for explanations why the trade has failed, even though those signals weren’t obvious at the time.
Do not change your indicator or setting after a loss to come up with explanations or excuses. Accept that losses are normal and always follow your plan.
Hot-hand fallacy After a successful outcome on a random event, another success is more likely. Traders believe that once they are in a winning streak, things become easier and they can “feel” what the market is going to do next.
I wrote about the hot-dand-fallacy in trading before: click here
Peak–end rule People judge an event based on how they felt at the peak of the event. Traders look at a losing trade and only see how much they were in profit at the maximum, but don’t look at what went wrong afterwards.
Do not change your reference point when in a trade and have a plan for your trade management and when to exit before entering a trade.
Simulation heuristic People feel more regret if they miss an event only by a little. Price that missed your target only by a little bit, or a trade where you got stopped out just by a few points can be more painful than other trades.
The outcome is out of your control and you cannot influence the price movements. The only thing you can do is manage your trade within your rules.
Social proof If unsure what to do, people look for what other people did. Traders too often ask for advice from other traders when they are not sure what to do – even when other traders have a completely different trading strategy.
You must take responsibility for your actions and results. And not rely on someone else.
Framing People make decisions based on how it is presented; a gain is more valuable than a loss and a sure gain is more valuable than a probabilistic greater gain. Traders close profitable trades too early because they value current profits more than a potentially larger profit in the future.
Cutting winners too soon is a huge problem. If this is an issue for you, reducing screen time can be helpful. Do not watch your trades tick by tick.
Sunk cost We will invest in something just because we have already invested in it. before Adding to losing trades because you are already invested, even though no objective reason to add exists.
You must define your stop loss in advance and then execute it without hesitation when it has been reached.
Confirmation Only looking for information that confirms your beliefs, ideas and actions. Blanking out reasons and signals that don’t support your trade and just looking for confirmation.
Especially when traders are in a loss, they only look for supportive information. Stay objective!
Overconfidence People have a higher confidence than what their level of skill actually suggests. Traders misjudge their level of expertise and skill. Consistently losing traders don’t see that it’s their fault.
Analyze your results objectively and get a trading journal to add even more accountability.
Selective perception Forgetting those things that caused discomfort. Traders forget easily that their own mistakes and wrong trading decisions caused the majority of their losses.
Do not blame the marjets, unfair circumnstances, your broker or any other outside event. You are the one who is responsible for making it work. It’s totally up to you and blaming others won’t help you make progress.
Which bias is the one that is causing you the greatest troubles? What are you workin on right now? Let me know in the comments below and I will answer with tips and ideas on how to overcome your struggles.
This chart is just for information
Never stop learning
I would also love to know your charts and views in the comment section.
Thank you
Note
Hello new traders
I want to give some tips for new traders,
This is bases on my mistake that I have done in the start of my trading journey
1. TREAT TRADING SERIOUSLY
If you want to become a professional trader, you must approach it with the rigour it demands. You can't live the millionaire lifestyle with a 9–5 work schedule, as I have stated on Twitter.
Check your priorities and make sure they line up with the things you do every day.
2. AVOID SHORTCUTS
There is no getting around putting in the hours if something seems too wonderful to be true.
There is no shortcut to being rich quick, and any that you may do will ultimately cost you far more in terms of time and money.
3. GIVE YOURSELF AT LEAST 5 YEARS
You won't turn into a successful trader in a matter of weeks or months. According to my own experience, it takes years for someone to develop the abilities required to trade profitably over the long run.
And when I say that, I don't just mean having the technical know-how to understand charts and perform technical analysis. How you handle losses, adapt to the always shifting market conditions, and work on your mindset are far more crucial.
4. REVIEW AND ANALYZE YOUR TRADES
Never have I encountered a successful trader who did not keep track of their trades.
Do you recall the last ten trades you made? The obvious response, if you're like me, is NO!
If you don't have a mechanism to keep track of every mistake you make, how can you expect to learn from them? To determine what trades are successful and unsuccessful, you must monitor and analyse them.
You must keep a trading journal if you take trading seriously.
5. DON’T RISK MORE THAN 3%
Losing runs will occur. Plan properly as a result.
When your position size is excessively aggressive, your account will suffer if you suffer 4 consecutive losses.
Before you sit down in front of your trading platform, be sure you have established explicit position sizing guidelines.
DRAWDOWN RECOVERY RATE
5% 5.2%
10% 11.1%
20% 25%
30% 43%
50% 100%
70% 233%
80% 400%
6. NO SYSTEM-HOPPING
One of the worst sins a trader can commit is system-hopping.
There isn't a trading strategy out there that will perpetually start printing you money.
Instead, have the ability to deal with the flaws in your existing trading strategy. Understand how to reduce your losses and let winners run. Learn how to deal with losses because even the best traders have loses occasionally in the world of trading.
7. HAVE A TRADE CHECKLIST
Since reading Marty Schwartz's book on the markets, I have maintained a trading checklist.
Use checklists to make your trading process more objective and to cut down on errors.
You run through your checklist, which contains a list of all your trading rules, before you press the buy or sell button to make sure you haven't forgotten anything.
Trade Checklist
#1 The setup meets all my entry criteria
#2 The trade is in my trading plan
#3 The trade is in the direction of the trend
#4 No news announcements ahead
#5 The risk/reward is acceptable
#6 I feel good emotionally and physically
#7 1 accept to lose
8. PLAN ALL TRADES IN ADVANCE}
You must schedule your trades in advance before you can even think about employing a checklist.
I go through all of my currency pairings every morning to look for any potential trading chances for the day. I create if-then scenarios for trading ideas, update my technical analysis, and set up price alerts. Then I just relax and wait to see if the price moves in the direction I need it to in order to execute my trading strategy.
9. TAKE FULL RESPONSIBILITY
YOU are accountable for anything that transpires in your trading. If something doesn't go as you expected, don't put the blame on your broker, insider trading, the media, or your wife. The only person at fault is YOU.
When you realise that trading is under YOUR control and that YOU have the capacity to change it, you will feel empowered. Blaming external factors will result in the loss of such power.
10. KEEP TRADING FUN
Your emotional capital is more crucial than your financial capital, and most traders would give up completely if they run out of mental capital.
There will be frustration if you keep making the same mistakes, don't see any results, and lose money for years.
As a result, follow all the advice given in this article and allow it lead you on your trading adventure.
This piece is not intended to be financial advice. Before making an investing choice, always do your own research and speak with a qualified advisor.
For more Quality Charts Analysis, follow us.
I'm grateful.
Note
Hello traders, today we will talk about THE COMPLEXITY OF TRADING
THE FIRST DECISIONS ABOUT YOUR TRADING STRATEGY
People who are unfamiliar with the financial sector may find it daunting to have to respond to several questions before they can even make their first trade. However, because each element and idea is interconnected with the others, leaving out even one will cause your otherwise flawlessly constructed trading strategy to fall apart.
Each and every one of the financial markets is significantly dissimilar from the others and requires a completely unique skill set and perspective. Do you prefer trading less leveraged equities that require a larger account to the 24/5 forex market where leverage allows traders to potentially make large gains with as little as a few hundred dollars? Are you more interested in trading on the simple spot market or the more complicated.
If you have to balance trading with your everyday life, time and time horizon are the main determining elements, and this directly relates to questions regarding your trading approach. The question of whether you want to be a day trader or a swing trader who holds positions for a longer period of time is related to the timeframes you want to trade and affects how long you keep positions. If you don't currently trade full-time, you will also need to figure out how to fit trading into your daily life. Additionally, you must choose your trading instruments, such as price action patterns and/or indicators. Which one you like is a matter of personal preference, but the fact that there are thousands of self-described trading experts
TRADING DECISIONS BEFORE YOU TAKE A TRADE
You are prepared to proceed to the next level once you have provided answers to the questions above. Once your trading strategy has been determined, you should be extremely clear about the entrance criteria, the significance and order of each entry condition, and whether or not the various entry criteria have an impact on your win rate.
Then, be completely honest with yourself and determine if you actually possess an advantage. Have you backtested your trading method without lying to yourself or cheating? If it's even conceivable, did you demo trade and handle demo trading as you would real money trading? Are you able to gauge whether markets have altered and are you ready to respond to them?
Additionally, you will need to have an organised and well-considered risk management strategy. Your trading performance is significantly impacted by the size of your account alone. If your account is too huge, fear and greed will dictate your trading choices, as opposed to your trading being very sloppy if your account is too small. What is your position sizing strategy, secondly? Do you utilise a fixed % amount for each trade, or do position sizes change depending on the strength of setups? Last but not least, how much exposure are you ready to take on for all open trades, and do you take correlations into account when making new trades?
TRADING DECISIONS WHEN YOU ARE IN A TRADE
You are prepared to make a deal once you have answers to all the previously asked questions. However, once you enter a trade, you are forced to handle a completely different set of issues while feeling the strain of actual market exposure. As a result, it's crucial that you have all the answers before making any transactions so that you can carry out your trading strategy without having to think too much.carry out your trading strategy without having to give it any thought.
Scaling in and scaling out, increased risk, and having to deal with comparable trading decisions if you have open positions in linked instruments are some of the ideas connected to risk management that come up in the questions. Do you also monitor how your risk-to-reward ratio changes throughout the course of a trade? Your risk management strategy will also influence how you respond to challenges like news events, unforeseen political and geopolitical developments, and making trades over the weekend.
The principles of risk are very intimately related to issues of trade management. Stop loss and take profit management are the two most crucial aspects of trade management. When a trade goes in your favour, do you actively move your stop loss order? If the answer is yes, develop a complex and tried-and-true stop loss technique rather than hopping around stops. For your take profit orders, the same is true. The reason why most traders take profits too soon is because they confuse a small pullback with a trend change. In order to improve, write down your stop loss and take profit management rules, test them, and evaluate their results.
Furthermore, non-chart events are just as significant as your active trading choices on your price charts. The difference between a competent, lucrative trader and a continually losing amateur trader is a sound trading strategy, where you map out potential trading scenarios beforehand and prepare your trades before they take place. His trading journal is the trader's second-most crucial instrument. A trader keeps a record of all of his previous trades in a trading notebook in an effort to identify weak points and improve his edge. Because it takes a lot of discipline and effort, yet will mean the difference between continually losing and making profits, it is surprising how few traders have neither of the two.
CONCLUSION: BEING A TRADER MEANS MAKING DECISIONS
Despite the fact that trading initially appears to be relatively straightforward, being a successful trader demands a very professional mindset and approach. A trader has to come up with sophisticated and tried methods to manage his deals before, during, and after they occurred. He must deal with a number of extremely difficult issues on a regular basis.
This article's objective is not to scare you away, but to inform you of the complexity of trading and provide you with a rule to follow in order to maximise the effectiveness of your trading strategy.
Be disciplined
Be flexible
Never stop learning
I would also love to know your charts and views in the comment section.
Thank you
Note
Note
![TOP 20 Key Patterns [cheat sheet]](https://s3.tradingview.com/6/6puZ59qW_mid.png)
Note
Note
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Register on CoinW and trade with me: coinw.com/front/affiliate?agentKey=CryptoMOJO&lang=en_US
Free TG Daily Futures Signals: t.me/CRYPTOMOJO_TA
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