Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Trading psychology

Lesson 4 of 7

Developing an unbiased, positive approach

Sometimes, your patterns of behaviour come about as a result of subtle influences. A bias can affect your judgment to such an extent that your decisions might go against all conventional wisdom.

Everyone has biases. They play a massive part in everyday life. You may buy a certain product at the supermarket because it's a brand you recognise, or read a particular newspaper because it backs up what you already believe.

There's no way to get rid of bias altogether, but if you're aware of how it may manifest itself, you stand a much better chance of minimising the impact on your trading.

Representative bias: Let's say you've been watching a market which has recently followed an uptrend. You take a position which, on this occasion, pays off. At a later date, you see the same market following an almost identical trend. Because of representative bias, you assume that, if you make the same trade again, you'll repeat your success. But even if two trades seem similar on the surface, it's key you treat every circumstance as unique.

Negativity bias: Looking back on a past trade, you might only see what went wrong. A particularly tough loss, or series of losses, will cause you to overlook any positive results you've had - and the equally positive decisions that led to them.

Gambler's Fallacy: If a market goes up for three straight days, Gambler's Fallacy says that it is likely to go up on the fourth. But beyond your own imagination, there's nothing to link events of the past to events of the future.

Status quo bias: Instead of looking for new ideas, you might be inclined to use those that have proved successful in the past - even if, objectively, they're no longer worthwhile.

Confirmation bias: Maybe you're confident the stock market is going to rise. With confirmation bias, you see only the news and information that supports your view, and gloss over anything that contradicts it.

Loss-aversion bias: You won't close an unprofitable position, holding onto the trade in the hope that it will end up paying itself off. This is similar to endowment bias, where you perceive those trades you've made as having a lot more potential than those you decided not to make. In both cases, when the price moves against you, you'll be reluctant to let go.

Herd bias: It's human nature to do exactly what everyone around you is doing, and traders are as susceptible to this as anyone. You need to have the confidence to make decisions based on your own research and trading plan - and to stick by these decisions when you've made them.

The emotional traits of successful traders

In this course so far we've looked at how to control emotions that can be harmful to traders. So let's now consider which personal characteristics you should aim to develop, if you want to get the best out of your trading:

Question

Which of the following words are likely to describe a successful trader? Please select the correct answers:
  • Decisive
  • Reckless
  • Self-aware
  • Self-indulgent
  • Disciplined
  • Hesitant

Correct

Incorrect

When you're in the thick of the fast-paced financial markets, a cool head and a disciplined approach will serve you well. You need to be ready to react quickly and decisively, but only when the opportunity is right for you. Know your skills and limitations, know what you want to achieve, and always be guided by your trading plan.
Reveal answer

Lesson summary

  • Be aware of bias and learn to recognise when it might be affecting you
  • We all tend to think in certain ways, but try to stay as objective as possible when you're placing a trade
  • Successful traders are generally calm and disciplined. They know their own limits, and they follow a clear plan to reach their trading goals
Lesson complete