Trading Biases – #AnirudhSethi

Trading biases refer to the cognitive biases that can influence a trader’s decision-making process. Some common trading biases include:

  1. Confirmation bias: This is the tendency to seek out information that confirms one’s existing beliefs and ignore information that contradicts them.
  2. Anchoring bias: This is the tendency to rely too heavily on the first piece of information encountered when making a decision.
  3. Overconfidence bias: This is the tendency to overestimate one’s own abilities and the accuracy of one’s predictions.
  4. Herding bias: This is the tendency to follow the actions of others, rather than making independent decisions.
  5. Loss aversion bias: This is the tendency to avoid taking losses and to hold on to losing positions for too long.
  6. Hindsight bias: This is the tendency to believe, after an event has occurred, that one would have predicted or expected the outcome.
  7. Representativeness bias: This is the tendency to judge the probability of an event based on how similar it is to a prototype.
  8. Recency bias: This is the tendency to give more weight to recent events when making predictions about the future.

It’s important for traders to be aware of these biases and to take steps to mitigate their effects. This can include developing a trading plan and sticking to it, setting clear rules for entering and exiting trades, and seeking out diverse perspectives and opinions. Additionally, traders can use quantitative models, like backtesting, to validate their decision and avoid cognitive biases.

In summary, trading biases refer to the cognitive biases that can influence a trader’s decision-making process. These biases can lead to poor investment decisions and can be mitigated by developing a trading plan, setting clear rules, seeking out diverse perspectives and using quantitative models.