Have you been caught holding onto a bias in your trading? Most traders have. A bias can be highly detrimental to trading, causing wrong trades and missed opportunities. It can trigger mental and emotional events that raise stress levels and can make any situation go from not so good to terrible in a flash.
Smart People & Denial
Sometimes, even very smart people can be in denial. Several years ago I drove down to Atlantic City, NJ with a group of friends to watch one run a marathon. Except for me, my friends were all Harvard graduates. They were definitely smart. I had a grand time driving down to Atlantic City with these clever people.
When we arrived, we began looking for the Flamingo Hotel where we had reservations for the night. Oddly, though, we were having difficulty locating our position on the road map (this was before GPS navigators). None of the streets matched our map. Somehow, we remained unworried, thinking that we would soon identify a street and our location.
After a half hour of aimless driving, we finally saw the Flamingo Hotel – cheers! Relieved, our problem was solved. But, wait. This hotel was on a different street than stated on our reservation card. How could this be? One of the Harvard grads had a solution. “There must be two Flamingo Hotels in this city.” Yeah, right.
Using the Wrong Map
As it turned out, the marathon was not in Atlantic City but Asbury Park, a seaside town about an hour north of Atlantic City. My smart friend never checked the race materials – he just assumed the marathon was in Atlantic City. So confident in this belief, he had all of us denying what any objective observer could plainly see: our street map was not a map of Atlantic City, but of Asbury Park!
It’s easy to have an idea and hold tenaciously to it even when the evidence is telling you differently. Traders are subject to it every day. Holding onto a bias is like using the wrong road map to navigate. You just spin your wheels.
What to do
So how can traders help themselves to know when their trading map is wrong? The best way to avoid holding onto a bias is to anticipate.
Let’s say you want to be a buyer in tomorrow’s market. That’s great; you want to look for buying opportunities and you should map out where those opportunities are likely to develop. But, you should also build some flexibility into tomorrow’s map. Anticipate ahead of time what it would look like if your bullish bias turns out to be wrong? What would tell you the market is acting different than what you expect? Then go a little further: Where would you find a short trade opportunity if the market begins selling off?
Building Mental Flexibility
Trading psychology can help you build mental flexibility. Mental flexibility allows for a wider range of responses to the market, not just a one-sided bias. Anticipating various scenarios is one of the trading psychology skills traders can build to stay flexible and keep from becoming tied to a specific market direction.
Anticipation is best done while reviewing today’s market action and preparing for tomorrow. Additional ways of becoming more mentally flexible can be found in the author’s guide to mental trading skills. This seven-part series is available free at his website. Just click here.
