Being involved in business ventures such as trading forex can be psychologically exhausting due to the unforeseen circumstances that a trader has to deal with. This is the reason why trading coaches advise their clients to make sure that they have a very stable mentality to survive the challenges of trading. For today’s lesson, we will elaborate 5 emotional biases that may psychologically affect a trader’s performance in the market.
1.Bias on Anchoring
This kind of bias occurs when we rely too much on a previously accepted piece of information and use it as a basis to process new decisions. Consequently, we become reluctant to create changes in our thoughts and plans because we think that the first information which we believe is better than the newer ones. Such bias is evident in trading forex when you purchase a currency at $ 60 and when the rates fall to $50, you start to evaluate and then later sell it even without significant signals of profit. It shows that some traders’ decision to take their respective positions could be influenced by a particular anchor (which in this case was based on the market rate) rather than the basic trading elements.
- Optimism Bias
Did you also know that overconfidence can cause false planning? According to professional trading psychologists, false planning occurs when a trader falls to the tendency to underestimate deadlines including the costs and risks that are associated with it. In relation to trading skills, some traders fail to accept the fact that they could somehow make mistakes in decision making even when they are already seasoned traders. Because of their belief in positive thinking, they put too much attention on the positive outcome and fail to acknowledge the negative ones.
- Availability Bias
This bias naturally occurs to people when the examples that they see or witness becomes a representation of possible outcomes. In other words, availability bias is simply misjudgement. When applied to trading forex, traders with this kind of bias would find it comfortable to trade with home based instead of global markets. They do this because of the thought that providers from their own countries are more reliable than foreign providers.
- Myopic Loss Aversion
This is a psychological phenomenon when traders become so emotional with their losing positions. Traders with such an attitude are most likely to be focused on short term investments due to the influence of narrow framing. To explain further, narrow framing happens when a trader considers a particular position without looking at the bigger picture of the trade. In a study concerning this phenomenon, it turned out that traders who were given too much facts about the market performance of their assets lost the chance to get potential profits because they were scared to face the risk of losing.
- Status Quo Bias
This is a term used to describe the attitude of people who are not open towards accepting changes of innovations. Said attitude is in fact related to Myopic loss aversion where people get too upset with losses no matter how small it is. For most people, a person with this behaviour would most likely be seen as irrational because he thinks that the strategies that worked for him in his past trades will work over and over even if it is no longer applicable.
With the disclosure of these psychological behaviours that are associated with all trades including forex, we strongly suggest that a trader needs to have a total awareness of his behaviour. Having one,two or all of these mental biases doesn’t mean that there is something wrong with your attitude. It only means that traders are also human who at times fall and make mistakes. All you have to do is to embrace your flaws and find ways to lessen if not eliminate them.