Cognitive Biases and Shortcomings That Affect Your Ability to Trade

Playing the stock market as a day trader or over the longer term is something that requires a lot of skill, knowledge and patience, as well as a keen analytical mind. However these aren't the only factors that will impact on your ability to make the right decisions when trading. In order for you to use your brain as a powerful analytical machine you see, you need to be free from distractions and it needs to be operating as efficiently as it possibly can be -free from emotional biases and issues that can stand in your way.

As such then, psychology will play a big part in trading and it's crucial that you be able to control your thoughts and not let emotions and faulty thinking stand in your way when making the best decisions. Here we will look at some of the cognitive biases and issues that can sometimes do that, and how to overcome them.

Confirmation Bias

Confirmation bias is a phenomenon that most people deal with that prevents them from being able to see their error when they make mistakes or have the wrong idea. Confirmation bias describes our tendency to seek out information that confirms our beliefs, and to be more likely to accept that information when we hear it.

In other words then, if you've already made up your mind that a company has good stock, you might find that you overlook evidence to the contrary. To avoid this problem then, you should make sure that instead of looking for information regarding your chosen business, you instead aim to find information that disproves your current views. This is the method taken by science which always aims to disprove the existing paradigm (rather than support it) and it's the stance you should take when trading.

Loss Aversion

Loss aversion describes the human impulse to avoid loss. Of course no one wants to lose money, and this is obviously a good way to think when you're trading. However this does become a problem when you start being more afraid of losing than you are motivated by gaining. In other words, if there's a 50/50 chance of your making money on a deal or losing money, even if the amount you could lose was smaller most people would turn down the option. This is biased decision making however, and particularly when something like trading requires the occasional risk.

Attention

Sometimes our brain simply lets us down because it isn't focussed enough on what's going on, or able to follow the progress of many shares all at once. Losing money simply because you didn't notice your stocks plummeting, or missing a great opportunity because you were asleep are all human weaknesses but they can be avoided by using market trading software that has been set up to trade on your behalf and to raise points of interest with you.

The Role of Emotion (The Adaptive Unconscious?)

The adaptive unconscious is a term used to describe the seeming accuracy of our split second decisions. In other words, I'm saying that emotion isn't always a bad thing and that sometimes going with your gut is the right decision - but you need to be aware of the biases that an off-the-cuff decision carry. When your gut backs up the maths and your heart and trading software tell you the same things, then it's time to buy.

at 11:49 PM
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