Learn to Trade
by Rob
October 7, 2016 Updated October 17, 2023
78
5 votes
Reading time: 3 minutes
It's been said often that if you can keep your head and your wits about you while others are losing theirs, then you have what it takes to be successful trading or investing for the long term. Being an objective trader doesn't always come naturally, though. For many, it's a learned skill that requires the trader to identify and overcome certain biases, some or all of which they may not even know they have…at least at first.
Table of Contents
- You're an Objective Trader if…
- You don't have strong opinions about the market
- You aren't swayed by news and outside analysis
- You readily accept when the case for a trade has been invalidated
- Common and Costly Trading Biases to Avoid
- Monetary bias
- Recency bias
- Confirmation bias
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So how do you know if you're an objective trader or a biased one? Well, performance results notwithstanding, taking a closer look at ones trading process may reveal a lot along these lines. So with that, what follows are some ideas for self-diagnosing whether you're indeed as objective as you may think, or if some degree of bias might be interfering with your trade planning and decisions.
You're an Objective Trader if…
When put on the spot, many traders would be quick to say something like, "Sure, I'm an objective trader; I use technical analysis and just trade what I see happening on the charts." And unless there's any evidence pointing to the contrary—like failed logic, broken rules, or persistent mistakes—we might all be inclined to take that claim at face value.
It's proper to be an objective trader, afterall, but don't just say you are objective for the sake of it. Instead, really take an honest look at your trading process, and examine these various components to know with more certainty whether you're an objective trader, or if hidden biases are a problem you must contend with.
You're probably an objective trader if…
You don't have strong opinions about the market
Being an objective trader requires that you not allow preconceived notions like "USD is the only real store of value right now," or "EUR is a real dog" sway your judgment in any way. You may think these things, sure, but if your strategy flashes a signal to the contrary, and you can then switch off those opinions and be disciplined in trading the way your strategy dictates, then indeed, you're an objective trader.
You aren't swayed by news and outside analysis
The persistent "noise" originating from across the markets and financial media can really put ones objectivity to the test. Sometimes a talking head on TV or the Internet can make a compelling argument, but if you can remain focused and factual in staying your own course—and not being talked in to or out of trades by outside influences—then again, you're probably an objective trader.
You readily accept when the case for a trade has been invalidated
Often one of the hardest things to do when trading the markets is admit we are "wrong." That's often why traders do crazy things in the face of losing trades, things like doubling down, or widening their stop in hopes for a sharp turnaround. In contrast, though, if you see real, chart-based evidence that the initial justification for taking the trade no longer exists, and you have the poise and wherewithal to "take your medicine" and move on to the next trade, then you, my friend, are an objective trader.
See related: 5 Trading Habits to Bring to Market Every Day
Common and Costly Trading Biases to Avoid
Trading quickly turns into an uphill battle when pre-existing and/or learned biases begin to creep in. There's really no faster way to cloud objectivity and judgment, or cause hesitation and "unforced errors" than letting biases effect our decision making.
And, along those lines, there are a number of common, costly biases to be mindful of, including:
Monetary bias
Do you get nervous or have a harder time executing trades when real money is on the line? Are you afraid of losing money, or perhaps even worse, are you scared to be successful and bear any of the additional attention or self-imposed pressures that would entail? If you, for any number of reasons, obsess too much about money while trading, it could easily be part of a monetary bias, which greatly hinders results yet commonly goes undetected among traders.
Recency bias
This is a condition where traders allow recent trades and outcomes to impact their mindset and decision making going forward. This causes overconfidence if the recent trades were winners, hesitation if the most recent trades were losers, and poor decisions stemming from the loss of focus and added emotion.
Confirmation bias
Some traders crave additional validation in order to increase confidence. This causes delayed execution, and although confidence may go up, studies have shown that more confirmation does not translate into better trade results.
There's also media bias, which we alluded to above, as well as countless other biases that can come into play for traders, often unbeknownst to them. That's why it's all the more important to be an objective trader, honestly tracking results inside your trade journal, since that's where telltale evidence of biases and flawed thinking might surface.
