Get started

Bias

The Value of an Unbiased BiasHi everyone, In this video I would like to discuss the value of having an unbiased bias when it comes to your analysis. It’s a dry subject with only a little chart illustrating near the end, but the boring stuff usually tends to be the most important topics when it comes to making it in this industry. I think most of us are familiar with the word ‘bias’. For those that aren’t, basically, in the context of trading, all it means is being in favour of the market moving either to the upside or downside. Your bias comes by means of your analysis and can be related to any timeframe. For example, I could have a bullish bias on a higher timeframe monthly chart, and a bearish bias for the lower timeframe daily chart. Now, you don’t HAVE to always have a bias. If you don’t know, then you simple don’t know, and there is nothing wrong with that, it would be unreasonable and nonsensical to think otherwise. But, sometimes your bias is wrong, which leads me to the topic of this video. I believe even for traders who don’t know how to form a technical bias, do so anyway in the form of psychological bias. Most of the time, we think the market is either going up or down, hence why we would even get into a long or short position. The tricky part is being flexible and changing your bias when the market is indicating you are clearly wrong. Smart Money knows how we think, and they know how to create sentiment in the marketplace. This is why its crucial to be able to change your bias on a dime, WHEN it is applicable, WHEN your analysis is showing you, and NOT for any other reason. The later you are to the party, the less pips you can catch, and the less likely your trades will win. As humans, we tend to cling to our beliefs. We block out any evidence indicating that we may be wrong about them. And when the market is showing us that we may be wrong, we just tell ourselves “Well now the market is offering me more pips, I have to get in on this move!”, hence one reason how you get long or short squeezes. - R2F
FOREXCOM:XAUUSDEducation
by Road_2_Funded
Easiest way to determine BIASHere is an example of how to determine Bias for the day, or the open. Using the Open and Low or Open and High of the Daily candle in conjunction with the midnight opening price, we can easily determine Bias for the day, or for placing orders during the NY open. This example is shown on CL (Oil Futures) for a LONG BIAS. Just reverse for Short Bias. ( I mistakenly typed High when I meant Low in the example's text.) Adding this to an existing strategy or entry technique can be very powerful. I hope this is helpful for everyone. Happy Trading!
NYMEX:CL1!Education
by The_Lioness
9
Introduction to Behavioral FinanceIntroduction Behavioral finance is a captivating field that explores how human psychology affects financial decision-making. Traditional finance models assume investors are rational beings, making logical choices to maximize wealth. However, behavioral finance acknowledges that emotions, cognitive biases, and herd mentality often lead individuals to deviate from rationality. In this article, we delve into the intriguing world of behavioral finance, investigating the psychological factors that influence investors and traders and how these elements impact their decision-making processes. Cognitive Biases: The Subconscious Pitfalls Cognitive biases are ingrained mental shortcuts that our brains use to simplify information processing. Although helpful in everyday life, these biases can lead to significant errors in investment decisions. Common cognitive biases include: a. Confirmation Bias: Investors tend to seek and favor information that supports their existing beliefs or opinions, ignoring contradictory evidence. This leads to a skewed perception of market trends and an unwillingness to challenge preconceived notions. b. Overconfidence Bias: Many investors overestimate their ability to predict market movements, leading to excessive risk-taking and potentially significant losses. c. Anchoring Bias: This bias occurs when investors fixate on a particular piece of information (e.g., the purchase price of a stock) and use it as a reference point for future decisions, disregarding changing circumstances. d. Loss Aversion: Investors often fear losses more than they value gains, causing them to hold onto losing positions for too long in the hope of a turnaround, leading to missed opportunities. Emotional Influences on Decision-Making a. Fear and Greed: Fear and greed are potent emotions that profoundly impact investment decisions. Fear can trigger panic selling during market downturns, while greed may fuel excessive risk-taking in pursuit of high returns. b. Regret Aversion: Investors tend to avoid making decisions that might result in regret, such as realizing losses on investments. This reluctance may lead to inaction and failure to rebalance portfolios as needed. c. Herding Behavior: Humans are social creatures, and this extends to financial markets. Herding behavior occurs when investors follow the actions of others, even when it may not be in their best interest, potentially exacerbating market trends. d. Availability Heuristic: Investors often rely on easily accessible information or recent events to make decisions, leading to an overemphasis on recent market trends and news. Conclusion Behavioral finance sheds light on the critical role psychology plays in investment decision-making. Cognitive biases, emotions, and herd mentality can lead investors astray, affecting their financial well-being and market stability. Recognizing these psychological factors is essential for investors and traders seeking to make more informed and rational choices. As financial professionals continue to explore behavioral finance, the integration of psychology with traditional finance models promises to enhance our understanding of market dynamics and human behavior in the world of finance. By embracing the insights offered by behavioral finance, investors can take steps to minimize biases and make more objective and strategic investment decisions for long-term success.
Education
by financialflagship
Overconfidence BiasCauses of overconfidence bias In order to define overconfidence bias, it is important to understand some of the causes. These could include: Doubt avoidance. Very often, people don’t like moments of ambiguity or doubt. Overconfidence could work as a solution, with the overconfident person feeling confident in their abilities to feel sure, even in a situation where they should feel doubtful. Inconsistency avoidance. A lot of the time, people search for consistency when it comes to new ideas. There is a tendency to search for a link between previously held beliefs and new ones. This may lead people to hold onto their old ideas, even if new evidence contradicts them. The endowment effect. This phenomenon is where people overvalue things purely because they own them and could feed back into overconfidence. Hindsight bias. Hindsight bias, the false belief that they saw something happening before it happened when they didn’t could lead to overconfidence. Incentives. Sometimes, the higher an incentive someone has for doing something, the more determined they are to do it. This could make them believe they have made the right judgments and have the skills to get it done, even when they don’t. Types of overconfidence bias Overconfidence can come in various forms, including: Illusion of control: This type of overconfidence bias refers to the belief that someone has more control over a situation than they do. In trading, it could lead to traders believing they can control the market when they can’t. Over ranking: This refers to the belief that someone is more talented than they actually are. This is common because no one wants to believe they are below average. In trading, this could lead to traders making trades based on overly optimistic forecasts, culminating in potential losses. Timing optimism: This is when someone incorrectly thinks they could do work far quicker than they can. This relates to trading when traders believe a trade or investment would pay off far faster than it could. Desirability effect: Perhaps better known as wishful thinking, this is when someone thinks that something will happen just because they want it to happen. Overconfidence bias examples These are some hypothetical cases where trades could go wrong because traders have fallen victim to the overconfidence effect: Believing an asset’s price will continue moving in the same direction – An example of overconfidence bias in trading is when a trader believes an asset will continue to move in a way that benefits them, despite receiving negative news or signals. Suppose a trader made a profit when going long on a contract for difference (CFD) on Amazon (AMZN) shares. They now feel confident the price will likely continue rising, leading them to hold onto the position for too long, meaning there are significant losses when its price trajectory changes. Ignoring risk – Overconfidence could lead traders to ignore potential risks associated with an investment. For example, they may miss the risk associated with a particular sector or industry and trade it heavily. This could lead to significant losses if the sector or industry experiences a market correction. Overtrading Overconfidence bias could make traders believe they may make quick profits through frequent trading. They may take more risks than they should and trade too frequently, leading to high transaction costs and lower returns. Overtrading could also lead to a lack of trading discipline and increased susceptibility to making mistakes. Failing to consider alternative viewpoints Overconfidence bias may be linked to confirmation bias, where people seek information supporting their beliefs while ignoring information contradicting them. This could result in traders ignoring or missing important information and making decisions based on incomplete or inaccurate information, potentially leading to losses. How to counteract overconfidence bias There are ways people can consider if they want to overcome and counteract overconfidence bias. These could include: Acknowledging it. Knowing that overconfidence exists could be the first step in tackling it. Being realistic. Understanding that you do not always make the best decisions all the time could help guard against overconfidence bias. Researching the market. Knowing that markets can do unexpected things very often could help someone understand the consequences of overconfidence. Keeping a note of trades. A trader who records their trades could look over them, see where they went wrong, and gain a perspective that could prevent overconfidence bias. Being diligent. Doing their research and trying to make trades based on facts rather than emotions, coupled with regularly checking and updating their trading strategies, could help stop someone from suffering overconfidence. Conclusion A simple overconfidence bias definition is the tendency to overestimate one’s abilities, knowledge, or judgement that could lead to excessive confidence and risk-taking and result in significant losses. Traders and investors should be aware of the different types of overconfidence and take steps to avoid them, such as seeking out diverse sources of information, avoiding making trades based on emotions, and regularly reassessing their investment strategies. By doing so, traders could minimise the risk of overconfidence bias and make more informed trading decisions.
SP:SPXEducation
by Capitalcom
Dealing With Confirmation Bias In TradingConfirmation bias is a self defeating attempt to impose one's own bias on the market. This most often results in pre-trade chart blindness. When we analyze the market with a preset bias, we will only see confluences, patterns, price action, and setups that confirm our bias. This is the human flaw of needing to be correct. The need to be correct will cause traders to subconsciously ignore chart information that would prove us wrong. Confirmation bias results is the inability to objectively analyze the market. Have you ever noticed that you see a setup and you feel confident before entering the trade that it will work out in your favor based on your analysis. But as you re-assess after entering the trade, you notice multiple confluences that indicate that you may have picked the wrong direction. This is pre-trade chart blindness. You can't see the obstacles to your trade because you have only found the confirmations that support your need to be correct. It is better to allow the market to determine the bias for us. Price leaves us clues to it's direction and intent. It is our job as traders to objectively weigh the evidence for a buy or a sell. Just as a detective collects evidence that will either prove innocence or guilt in a court of law, we must put our trade setups on trial. We must weigh the evidence impartially and without bias to determine if our setups are innocent (valid) or guilty (invalid), without being attached to proving ourselves right or wrong. Realizing that you have subconsciously ignored an important piece of evidence after the trade has been executed is too late. There are 3 ways of dealing with confirmation bias: 1. Remain objective and unbiased in your analysis. Don't tell price what it should do, listen to what price is telling you. Your trade setup is on trial and it will give a confession, but you have to be willing to listen and accept that confession. Warning: Your trade setup may lie under oath (manipulation) so be prepared to always follow the strongest evidence. 2. Take the trade on demo first to quickly move past your pre-trade chart blindness and allow yourself to see clearly what you may have missed due to confirmation bias. If the trade setup is still valid after entering the trade on demo, then take it for real. This will also help with patience and prevent you from getting in too early. 3. Play devil's advocate. For example, if you believe based on the evidence that the trade is a buy, try to find all the reasons that it would be a sell. Weigh the evidence for a buy against the evidence for a sell to identify which has a higher probability. As a bonus you can make the comparison of the risk to reward of the buy and sell setups as another determining factor for which trade to take. Recognize that confirmation bias exists and anyone can be a victim to it. Being self aware of your potential for confirmation bias and taking steps to mitigate your own bias should be a part of your pre-analysis and pre-trade routine.
Education
by MartialChartsFX
Learn What is Confirmation Bias | Trading Psychology 🧠 In this educational article, we will discuss one of the most common cognitive errors of newbie traders - a confirmation bias. In order to better understand that term, I want to start with the example: Let's say that after doing some research, you are highly convinced that Bitcoin is bullish and that it is a decent investment. You decide to buy that from 50.000 level, expecting the exponential growth. Instead of growing, however, the market starts falling rapidly. Rather than closing your position in loss, you decide to do a new research and execute the analysis, you start looking for the proof of your pre-existing beliefs. You completely neglect the voices of Bitcoin sceptics and ignore bearish clues on the price chart. You consider only the facts that support a bullish outlook, not letting you accept the other point of view. You become a victim of a confirmation bias. Unfortunately, such a psychological trap frequently prevents a closing of a trading position in time, leading to substantial losses. Confirmation bias is a common psychological error that makes a subject overvalue the information that upholds his existing beliefs and undervalue the opposing one. Here are the most common symptoms of that trap: 1️⃣One is neglecting the objective facts. 2️⃣One is interpreting information in a way to support the existing beliefs. 3️⃣One is considering only the facts that conform with his point of view. 4️⃣One is completely ignoring the information that challenges his beliefs. The only way to beat a confirmation bias in trading, is to learn to analyze the market from sellers' and from buyers' perspective. Your task is to compare the view of the 2 sides, and pick the one that is stronger, holding in mind the fact that everything can change. You should always remember of the changing nature of financial markets and be ready to always reassess your views. ❤️Please, support my work with like, thank you!❤️
OANDA:XAUUSDEducation
by VasilyTrader
13
The Value of PriceA basic concept in price action trading is that when it comes to the analysis process of price, some candles are more valuable than others. By "more valuable" I mean, some candlesticks have more weight in the analysis process of price than others. Before I explain which candles have more inherent value, let me explain a bit of price action philosophy. When it comes to an asset's price, or even the market in general the price action trader believes that it is a living breathing entity. Just the same as you and I, the market's movements differ from day to day and past behavior does not predict future behavior. That said, just like you and I, the future behavior of an living breathing entity is much easier to predict if based on the analysis of recent behavior. So in other words, if I were to predict your next move, it is much easier and practical to base that analysis on your recent behavior, rather than your behavior 2 years in the past. So this core philosophy pretty much dictates how you can set values to price. Simply put," Current price is more valuable than past price in terms of the analysis process". So if you were to predict the future direction of the price of an asset, it is wise to analyze current price rather than past price; simply due to the fact that past price has less weight in terms of the analysis process than current price.So for example, if your analysis of price for the last 3 months was stating that price will rise in the future; however this week's price is stating that price will fall, the price action trader will not hesitate to sell as dictated by their analysis of current price. So the next time you find yourself confused about the future direction of price due to conflicting signals. Ask yourself, " what is current price telling me about the future direction of price?" and let past price stay where it belong, "in the past." That's it! Have a great day! Ken
Education
by TradingForexPriceAction
1
When to Change Bias in TradingHello Traders! Do you ever wonder, "When is the trend ending?" or "When should I change my directional bias?" Many traders find it hard to figure out not only how to choose a directional bias for the day, or how to change their bias if they are on the wrong side of the trade. In this educational video tutorial, I provide simple confirmations to discern when to change your bias and how to look for your next entry! Traders, we would love to hear your opinion and how you determine directional bias. Write in the comments and share with us! Cheers, - BKH
Education
by BKTradingAcademy
5
Recency Bias With Streaks and Occurrence FrequencyIn this video idea, I discuss the idea of how to check for bias in recent events in an indicator by requiring that X of the last Y candles meet a certain condition. It is common to refer to recency bias as something that can skew your view on things based on recent events. In this case, I am referring to applying a bias to our indicator based on recent events. I show you how I go about checking for occurrence frequency to require that X of Y candles are red in this example. Specifically, we check for at least 3 red candles in the last 4 or 5 candles. By using float values to represent true or false with a 1 or 0 we can easily sum the values of the 1 or 0 on our conditions for the last Y candles. Once we get the occurrence account we can compare the occurrence that actually occurred to the number we actually required on X. We take this a step farther and show how this might be used by requiring another condition to be true on the current candle as well and plot to share when this next condition is true or false (1:0) as well.
BITSTAMP:BTCUSDEducation
by BigBitsIO
1
Aussies heading into troubled zoneThere are no promises, guarantees or predictions in this. The Aussies have been flattening out at a top - it appears - at this time. There are only two directions for price - nothing new in that. What happens in situations like these is: 1 - either price collapses. 2 - it rockets north. You can imagine what bulls and bears would say to each of the above. Their inherent biases controls their minds. Biases predetermine - quite unconsciously - what logic will arrive at. Hence people get into 'predictions', then punch the air when price confirms their bias. Both the nature of confirmation bias and prevalence-induced concept change should be studied by all traders. Some say ' What's psychology got to do with this? ' I'm sorry for some. How does one control how wrong a bias may be? It's called a stoploss! Disclaimers : This is not advice or encouragement to trade securities. No predictions and no guarantees supplied or implied. Heavy losses can be expected. Any previous advantageous performance shown in other scenarios, is not indicative of future performance. If you make decisions based on opinion expressed here or on my profile and you lose your money, kindly sue yourself.
FX:AUS200Education
by Captain_Walker
200 EMA - best use for entries!I don't use indicators, they're not my style, they lag, they repaint; and in my opinion they don't work. The 200 EMA on DAILY can be useful because of how slow it is. We can use it to filter the direction of which way we trade. Price ABOVE 200 ema = ONLY BUY Price BELOW 200 ema = ONLY SELL Then drop timeframes for your entries via your strategy whatever that may be. If your strategy says go long but price is below EMA, don't take the trade etc... Ignore the EMA on other timeframes lower than the daily. You want a slow daily direction indicator. Don't blindly trade this, wait until price is clearly past the EMA and maintaining a good distance from it. Use it as a guideline if you struggle working out fundamentals to help you filter a direction to trade. NOT TO REPLACE FUNDAMENTAL ANALYSIS!!!
Education
by joebrownFX
Psych Hack #0007 - decision-making - it's what we do. Everybody - I mean everybody - who is actively trading has to make decisions. Entry points, exit points, trailing stops, stop-losses and so on - they all involve decisions. But what affects the integrity of our decision-making ? Some say we don't need to make decisions, once we follow a mechanical trading plan. I disagree 100%. If everybody could follow a mechanical trading plan and be millionaires it would have happened already - it ain't happening! End of. I say that our decisions are made in our heads - our brains, our minds. I say that I (we) need to know about the pitfalls in decision-making - pitfalls that may affect our minds. I'm sharing some things I've learned with others. These may not be of relevance to everybody. However, as the hard evidence shows that between 75 and 90% of all traders lose money consistently, I think it should be of relevance to a majority. Declaration : None of this is advice - even if so construed. Opinions on the two charts shown are not be relied upon. Your losses are entirely your own.
Education
by Captain_Walker
The markets are there to make you feel stupid or brilliantMany a trader will have made their best analysis based on information at the time and then taken an entry position, only to find that the market does something unexpected. Price may move violently in the wrong direction i.e. not the favoured direction and comes close to a stop loss or actually stopping out the position for a loss. Now with hindsight a trader feels or thinks, " How stupid - I should have seen it coming. I shouldn't have done that. " This happens enough times to new traders. Seasoned traders live with it and have less such self-talk. I think it's important to acknowledge those feelings. These are partly thinking processes and emotional processes. New traders often feel demoralised after 10 or so failures in a row. " Am I doing something wrong? " - they may think. This is a reasonable question. It could be that something is wrong. However, nothing may be found wrong with one's methodology or application of one's personal rules - after a careful reassessment. It's good to check. The BTCUSD chart shows what is some sort of 'head and shoulders' pattern. It's not the best picture of it in the world but something is there. Wherever one takes a position in BTCUSD, it could be wrong. Why? The markets respect no one person. A proportion of traders will have taken a position in this and made some real profits. They will punch the air and with joy go, " YESSSS!! " From my long experience I've learned that 'feelings' of being right or wrong, actually bends the mind a trader. I'm speaking for myself quite clearly. Others may have similar experience. A feeling of being good after a string of wins, often creates a subconscious sense of confidence. Imperceptibly this can creep into future trades and then one realises some major losses. My own strategy is to try at best to reduce trading frequency and exert even greater diligence in entering trades after a series of wins. I aim to expect the unexpected. It's always a tad difficult when I get stopped out for a loss. But I repeat to myself that the stoploss is there to protect against the 'unexpected' - so it's not actually unexpected. It is a limit. It is the expected limit of price moving not in a favoured direction. There is no single path to 'a promised land' in trading. Traders can adopt different methods, different rules, and be consistently profitable. The largest obstacle which is difficult to train out a trader, is their own personal psychology . By this I mean things like attention to detail, biases, emotions, discipline etc. So in many ways feeling stupid or brilliant can affect our future decision-making in imperceptible ways. Traders can lose discipline after losses or big gains. Mark Douglas spoke about these sorts of things. The BTCUSD chart is not intended to attract thoughts on whether to go long or go short. I'm not really interested in whether the H&S is there at all or correctly drawn. I'm taking it beyond that. What happens next to traders who come out of this period - some bruised, some overjoyed? Trading is not about winning one trade or a small handful. It's about the long road ahead. I'm delighted if others can share their experiences.
BITSTAMP:BTCUSDEducation
by Captain_Walker
Key Heuristics and Biases in Trading - Educational PieceThere is an extremely famous psychology paper written by Daniel Kahneman and Amos Tversky named ‘Judgement Under Uncertainty: Heuristics and Biases’ (psiexp.ss.uci.edu) (Kahneman won a Nobel Peace Prize in 1992 for his work in the field, specifically on prospect theory) which explores the decision making process. As trading requires decisions to be made constantly – stop loss adding, lot size, whether a trade is right to take etc – I think a quick write up would be highly applicable. Essentially, there are several ‘heuristics’ or ‘biases’ which I will attempt to put into a trading context. 1) Reliability . Making sense of data on the spot is a difficult task to undertake. When you look at a chart, you are looking at a representation of the market and not the actual market. Adding more and more indicators causes the reliability of this data to further decrease, possibly leading to a distorted view (however, if you are profitable with indicators then that is all that matters). 2) Representation . We normally feel that if a pattern is forming that it will play out in the way we expect. When back testing, you may look for data to represent the notion you have about a certain set up and ignore the set ups that have failed, therefore leading to a skewed view of that strategy. Indicators represent a potential set up and not what is actually occurring – indicators are used to fit a concept in your head. The fact that something is more representative does not make it more likely to occur. 3) Anchoring . Do you remember that month when you did fantastically and the next month you lost 5% of your account under the belief you could continue your run and then possibly ditched your strategy to start from scratch? This is called anchoring – you place some meaning on a certain set of results with the thought that the initial point is meaningful. You will face losses. Maybe even a quarter where you make no money. On the flipside, you may triple your account. The market is impartial to you, your strategy and your money. 4) The Gambler's Fallacy . When an event occurs more or less is a short time period, you may believe that it will happen less or more in the future. As said before, the market is impartial. Past events do not change the probability of future events occurring. 5) Hindsight bias . ‘I knew that was going to happen’. This is reasonably self explanatory and I think everyone has faced this once or twice (maybe nearer 1000) times in their trading career! Automated traders do not have the problem of biases as the emotion is taken out of the trade, which is why possibly developing an algorithm can be hugely beneficial if you have a stringent set of rules that you can programme into a computer. There are many more biases. Which have you noticed in your trading?
Education
by DavidBelleFX