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Every Trader's Most Common, Costly Bias

Every Trader's Most Common, Costly Bias

2013-10-18 21:07:00
Research, Research Team
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Talking Points:

  • The “#1 Account Killer” for Traders
  • How to Leave Opinions Out of it

In trading, even a viable plan is no guarantee of success. We all need to realize upfront the cost of not being patient and disciplined before coming to the realization that the method is not the problem, we are. A wrong thesis can easily lead to unnecessary drawdowns, which occur regardless of whether or not you have sound method, but there can be a simple solution for avoiding that problem.

Always Beware of a Thesis

Having the wrong thesis is perhaps the number-one account killer for traders. More often than not, a person has a predetermined opinion about what a market is going to do before even viewing that market through the lens of an objective methodology. No matter how good the trading method, someone who believes they’re right about the future direction of a market is only going to heed the method when it agrees with their opinion. Of course, this is backward thinking.

Traders should always heed the method, even if that requires taking trades that are in total disagreement with their thoughts and feelings about the market. The real danger here is allowing the desire to be right to overshadow the danger of losing money. It is far better to have your opinion proven wrong and make money than to hang on to a belief and lose money, especially in a margined account.

We routinely talk about bearish long-term weekly patterns in EURUSD, but more often than that, we highlight shorter-term buy signals in that very same pair.

See related: Perfectly Good Set-ups Many Just Let Slip Away

Benchmark Your Trades

The key to avoiding the dangers of an ill-timed opinion is to benchmark your trades. Keep track of all of live or demo trades in a spreadsheet and rate each trade in terms of how close you came to following your trading plan to the letter, with a 0 or 1 indicating you did not stick to the plan and a 5 meaning you followed the plan exactly.

Be honest with yourself and record every trade on the spreadsheet. At the end of each week or month, go back and see your overall performance and the scores of your individual trades. You will quickly discover where your problems may lie and may then determine how to adapt in order to produce better results.

There is an old saying that we “buy on fear and sell on logic.” Be aware of this, particularly if you have strong beliefs about politics and/or the economy. It’s too easy to base a market thesis on either of those factors, and the more powerful the belief, the harder it will be to maintain objectivity in the markets.

Next time, we will cover the dangers of “ownership” and the inability to follow orders.

By Jay Norris, author, The Secret to Trading Forex, Futures, and ETFs: Risk Tolerance Threshold Theory

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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