1. Emotional bias: the tendency to believe the things that make you feel good and to disregard things that make you feel bad. In trading terms, this means ignoring the bad news and focusing on the good news. It’s called losing objectivity; you don’t recognise when things go wrong because you don’t want to.

2. Expectation bias: the tendency to believe in things that you expect. In financial terms this means not bothering to analyse, test, measure or doubt the conclusion you expect or hope for. It is also known as the law of small numbers – believing in something with little real evidence.

3. The disposition effect: the tendency to cut your profits and let your losses run – the opposite of what a trader should be doing. Making small profits and big losses is a recipe for disaster.

4. Loss aversion: the tendency to value the avoidance of loss more highly than the making of gain. Losses impact on you more than gains. Because of this you become more emotional when making losses, the point at which a rational decision would save you the most money.

5. The sunk-cost fallacy: this is the tendency for our decision-making to be influenced by the size of the loss we have already incurred. The bigger the loss, the more likely we are to persist with a losing trade rather than take the rational decision to cut to a more profitable trade. The size of your loss has no impact on the future share price but a huge impact on your ability to make the right decision.

6. The bandwagon effect: the tendency to think it must be right because everyone else is doing it – a thought process guaranteed to get you in when it’s obvious and get you out when it’s obvious. Put another way, it has you buying at the top and selling at the bottom.

7. Past-price fixation: the tendency to avoid prudent trading decisions by anchoring your thought process to prices that no longer exist. “I’ll sell it if it gets back to rS.50.” “I’ll buy it if it gets down to rS50 again.” We are all guilty. In trend-following trading, if the price goes up, you don’t sell it, you buy it; if it goes down, you don’t buy it, you sell it. The old high has gone, the old low has gone. Don’t wait for them to come back to do the wrong thing.

Technically Yours

Anirudh Sethi