*****David Blair, The Crosshairs Trader, is a blogger/trader/educator who does a wonderful job of sharing research on elite performance and how it relates to trading. Below is his latest post for the SMB trading community.***** — Editor’s Note
For anyone who follows me here or at my blog know I am focused on the mental aspect of the trading game. In fact, I believe trading is 100% mental from choosing the types of charts you will use to what you will trade to how you will trade it. We all approach trading via mental biases formed from experience and exposure. The science of behavioral finance is beginning to take a leading role in helping investors and traders better understand the decision making progress that affects stock prices. We would be wise to study the reasons behind the decisions we make. In doing so I am sure we would discover hidden biases that when properly managed could enhance our trading performance. It is all a matter of wanting to get better acquainted with ourselves. The following resources will help you begin the journey of self discovery.
A Visual Guide to Cognitive Biases
Wow! We have a lot of studying to do!
Regardless of how disciplined, humans often trade with behavioral biases that cause them to act on emotion.
Some social psychologists believe our cognitive biases help us process information more efficiently, especially in dangerous situations. Still, they lead us to make grave mistakes. We may be prone to such errors in judgment, but at least we can be aware of them.
These cognitive foibles that affect all of us have a significant impact on our decision making, whether we are aware of them or not.
There is no way to eliminate bias. It’s who we are, and those biases aren’t always liabilities. In investing, taking steps to minimize those biases is how the pros make money.
A cardinal concept from behavioral finance is that we do not process information about risk, reward, and uncertainty in a purely objective manner.
When it comes to trading, enhancing our performance inside the charts requires an awareness of various “outside the charts” thought processing biases that can adversely affect our outcomes.
The challenge of helping clients overcome the biases that limit their investment success is complicated by the conflicting emotions that drive their behavior.
Finance experts have long assumed that investors are rational, able to process information efficiently, evaluate investment options in an unbiased fashion, and seek to maximize profits while minimizing risks. The reality is often more complex, however.
Individual investors, in general, trade more than is good for them. Behavioral finance offers several explanations for why this is true.
Alright biased traders all, it’s time for some study outside the charts!
THE CROSSHAIRS TRADER
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