Cognitive Biases in Forex Trading
This article explores the cognitive biases in forex trading. The biases discussed in this article can play a significant role in any form of speculative trading and investing, not just forex trading.
A cognitive bias is a systematic flaw in how we think. Cognitive biases are present in every decision we face.
Anchoring Bias.
People rely too much on reference points from
the past when making a decision for the future -
they are "anchored" to the past.
Loss Aversion.
This is when people go to great lengths to avoid
losses because the pain of loss is twice as
impactful as the pleasure received from a win.
Confirmation Bias.
The confirmation trap is when traders seek
out information that validates their opinions
and ignore any theories that invalidate them.
Superiority Trap.
Many traders in the past have lost large sums
of money simply because they have fallen prey to
the mentality of overconfidence.
Herding.
Many traders in the past have lost large sums
of money simply because they have fallen prey to
the mentality of overconfidence.
Pay close attention to your decision making to spot the fallacies.
What do you want to learn in the next post?
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