Jump to content

Why Your Bias Will Ruin You


Recommended Posts

Why your bias will ruin you.

Why methodology is more important than prediction.

Why trade management is more important than trade entry.

Why 82% of traders lose money.

 

Haven’t had this argument on the forum for a while but it’s an old favourite.

 

Everyone starts by learning that trading is all about studying technicals and/or fundamentals then deciding on a bias, making a prediction, and finding an entry.

82% of traders lose money (FCA).

 

We have all seen the studies where professional stock pickers are beaten by a monkey, or by throwing darts at a list, or flipping a coin. Amazingly it’s all true. It is not the pick or the entry, the key to consistent results is proper trade management, cutting losers early and letting winners run for example, but most people do the opposite.

 

https://www.dailyfx.com/forex/fundamental/article/special_report/2015/06/25/what-is-the-number-one-mistake-forex-traders-make.html

 

People don’t like letting go of their bias, don’t like their predictions being wrong, so instead of acceptance they ignore what the price action is telling them, they move their stops wider ‘to give the trade a bit more room to play out’ eventually they just can’t stand it any more and have to get out. Their big losers cancel out any big winners.

 

Any single trade can only be either a winner or a losing trade and the probability of success on any one trade is 50/50. Your ‘edge’ (or methodology or plan) can only give you a higher probability of success over a series of trades, never over any one particular trade (see video).

 

Your edge will only work with disciplined trade management, if you don’t stick to your rules you don’t have any ‘edge’. You will only stick to your methodology if you have defined it, back tested it, demo’d it, then tried it live starting with minimum position size and proving it works over a series of trades.

 

Risk management needs to be continuous throughout the trade, not just at entry. All trades fail at some point, knowing where to let go should be part of the trade plan, not an after thought. Giving back all the paper gain on a winner because you were sure it would go higher is just as bad as widening the stop on a losing trade.

 

Your trade plan should allow only 3 possible outcomes to any trade, a small loss, a small win, or a big win.

 

Absolute must see 50 minute video, an interview with Mark Douglas.

 

To paraphrase Mark, ‘stop thinking like a gambler and start thinking like a casino’.

 

 

 

 

 

 

 

Link to comment

Archived

This topic is now archived and is closed to further replies.

  • General Statistics

    • Total Topics
      21,179
    • Total Posts
      90,702
    • Total Members
      41,288
    • Most Online
      7,522
      10/06/21 10:53

    Newest Member
    mIftikhar
    Joined 29/01/23 18:13
  • Posts

    • Does anybody know the BIL (SPDR Bloomberg 1-3 Month T-Bill ETF) equivalent with a GBP currency hedge? I want the interest yield but I don't want the currency risk.
    • Capital, win loss ratio. If you have a trading edge and you can consistently win 50% of your trades, so your winning 5 trades out of 10. So if your risking 1% of your capital per trade, out of your 10 trades 5 would be losers, so that’s 5% loss and realistically out of the 5 winning trades, some would make small profits, some break even and 1, 2 or 3 could run nicely IF you can let your profits run, basically your making money out of 2 trades out of the 10 trades (80/20 Rule Pareto principle) So a $20,000 acct risking 1% is $200 per trade, this will keep the trader with his trade risk based on being able to win 50% of his trades. A long term trend trader can win with 30% wining trade. Basically you need to know your numbers. Rgds Pete
    • Investing in stocks can be a great way to grow your wealth over time. However, there are different approaches that investors can take when choosing which stocks to buy. Two of the most popular approaches are growth investing and value investing. Growth Investing Growth investing is an investment strategy that focuses on buying stocks of companies that are expected to grow at a faster rate than the overall market. These companies are often in industries that are growing quickly, such as technology or healthcare. Investors who use this approach believe that these companies will be able to generate higher profits in the future, which will lead to higher stock prices. One of the main advantages of growth investing is that it can potentially provide higher returns than the overall market. However, it is also riskier than other investment strategies, as these companies often have higher valuations and more volatile stock prices. Value Investing Value investing is an investment strategy that focuses on buying stocks of companies that are undervalued by the market. These companies may be in industries that are out of favour or have recently experienced challenges, but they have strong fundamentals and a history of profitability. Investors who use this approach believe that these companies are undervalued and that their true value will be recognized in the future, leading to higher stock prices. One of the main advantages of value investing is that it can potentially provide lower risk than growth investing. However, it may also provide lower returns in the long run, as these companies may not have the same growth potential as companies in the growth investing category. Comparing Growth and Value Investing Growth and value investing are two different approaches to stock investing, each with its own advantages and disadvantages. Growth investing can potentially provide higher returns but is riskier, while value investing can provide lower risk but potentially lower returns. An investor may choose one approach or a combination of both. A portfolio that contains a mix of growth and value stocks can provide a balance of potential returns and risk. Conclusion Both growth investing and value investing can be effective ways to invest in stocks. The key is to understand the potential risks and rewards of each approach and to choose the one that aligns with your investment goals and risk tolerance. Analyst Peter Mathers TradingLounge™ 
×
×
  • Create New...