Forex Trading Wisdom: The Biased Trader

Talking Points:

  • Why we want a prejudice
  • How stimulation contours our prejudice
  • Anchor your stimulation in probabilities

What would be your largest hurdle a trader needs to overcome to succeed?

If you asked the particular question to experienced traders, they’d indicate the biggest barrier is involving your trader’s ears…in their own mind. Our mind can play games when we’ve a real income at stake.

The exact same experienced traders could indicate the way to get around this barrier, is to unwind, and have a trading program, and adhere to the strategy.

Let’s be real for a second…That’s Much Easier said than done!

We all know we ought to follow this master plan, however our minds plays games together why we have to deviate from this strategy. “This time it is different” is just a standard notion our mind uses for us to disagree. It’s paradoxical for the reason that individuals likely need to play games together to protect ourselves out of our mind matches!

TodayI would love to spell out, on another level, just what an inferior experienced trader can do in order to help them during that matter. It could appear as a surprise, nevertheless, you want to prejudice your trades. Bias your trades contrary to their probabilities as opposed to on a modest amount of outcomes.

First, let us develop a case for why a prejudice will become necessary, and we’ll talk about just how to anchor them.

Why We Need a Bias

The ending goal We’re looking towards is making great decisions using actual cash at Stake. There are many decisions a trader makes on each trade it can seem overwhelming. By way of instance, a trader should figure out the market to tradeand when to buy in, the length of time to put up the trade, when to move outside, and also exactly what trade dimensions. There are quite a few different decisions that go into in as well such as for instance, do I move my baldness, do I simply take partial profits and scale (you can find several more choices to be produced, however you get the idea ).

This very long collection of decisions to produce could have any pros and cons for each choice. Neuroscientist Antonio Damasio clarifies that so as to make conclusions, there’s a feature of emotion included. He saw patients together with faculties for logical behaviour intact — memory, attention, and logic. But, brain injury eliminated the individual’s power to see feelings and it disturbs him of creating powerful conclusions day daily. (Descartes’ Error: Emotion, Reason, and the Human Brain [Antonio Damasio])

In essence, it is our bias towards the pros and cons which impacts the decision we ultimately make.

To illustrate, if you were going to decide whether to go to the game tonight, you might think it would be fun and you get to hang out with friends and eat a good hot dog. But, that fun comes at the cost of tickets, parking, and time away from doing something else. If a person was not biased in their decision making, then they would not be able to arrive at a decision because of the competing pros and cons of going to the game.

If you just hurt your leg, the thought of walking a half mile in the parking lot then going up and down stadium stairs would bias your decision towards staying home. In the end, your decision making is influenced by feelings and a bias.

We Need a Stimulus to Shape Our Bias

Sometimes, the stimulus is created even if we can’t describe it. Damasio performed an experiment where he asked subjects to turn over cards that were placed in four different stacks. The stacks were rigged with two of the stacks producing gains (in play money) and two stacks producing losses. After nearly ten turns, the subjects starting showing physical reactions when reaching for a losing deck. After nearly fifty turns, the subjects could articulate a hunch about two of the four stacks being riskier.

When the experiment was replicated on brain damaged patients, none of the typical reactions occurred.

Absent the stimulus to produce a positive or negative feeling, there was nothing to overwhelmingly influence the brain damaged patients decision making.

In the game example above, there were reasons to go and reasons to stay home. The ultimate decision derives from an overwhelming stimulus either by experiencing good times or because of the desire to save money for a better time in the future. Absent the overwhelming stimulus, we get stuck unable to make a decision.

In the trading world, a newer trader often gets hung between the potential for profit and the possibility of loss. They don’t have enough experience to produce and overwhelming emotion about the trade set up. They in essence, lack the confidence and ability to’restrain’ a positive outcome and wind up freezing with indecisiveness. As a result, they let other things improperly anchor that emotion for them like their recent demo results.

Newer traders tend to rely solely on outcomes to develop their perceptions. The problem with the outcomes is that even though some of those trades may have been profitable, they are likely riskier over the long run.

Suggested Reading: What is a Good Win Ratio?

Bias your trades with probabilities

On the other hand, a more experienced trader will weigh those outcomes against their prevailing probabilities. They would have gained enough experience to know that some trades will win and some will lose and that they are looking at the larger collection of trades to determine profit or loss.

Suggested Reading: The First of Ten Trades

Experienced traders will try to down play the results of the most recent trade because they are trading a strategy. Each individual trade is just a small moving part of the much larger strategy.

Learn about other higher probability behaviors through Blueforexinstitute’s 45 page Traits of Successful Traders research guide. Learn four traits used by traders to give themselves an edge. (Registration required to download the guide.)

Newer traders, therefore, need to gain an impactful experience to properly begin weighing outcomes against probabilities. That experience is gained by trading a live account, even if it is in the smallest trade size possible.

Notice in the”pile of cards” experiment how ten turns needed to be played before an internal bias could be created. Then, another 40 turns needed to be played before the subjects could begin to verbalize what they were experiencing.

Many newer traders make the mistake of allowing themselves to be misguided by following solely their outcomes. Those misguided feelings lead to other poor trading decisions (over confidence, over leveraging) that lead to large losses.

After a series of large losses, the trader then decides the market is too random and cannot be timed.

By understanding how experienced traders bias their trades using the Traits of Successful Traders (TOST), a newer trader isgin immediately. Simply practice in a demo account, and then place at least 50 live trades in small sizes while adhering to the TOST guide. This will allow the trader to begin anchoring their results together with probabilities.

* Using the TOST guide does not mean the trader will be protected from losses. There is a risk of substantial loss with all live trades including those trades adhering to the TOST guide. *

–Written by Jeremy Wagner, Head Trading Instructor, Blueforexinstitute EDU

To learn more about implementing TOST, join Blueforexinstitute’s free Forex Fast Track course. The series of four fast track webinars are rooted in TOST and how to implement those traits.

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