Why Your Bias Will Ruin You

[Caseynotes]

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’.