Foreign Exchange Trading Biases You Should Avoid
When you trade forex you need to have a trading strategy and a system that you stick to. By having these strategies you ensure that you are trading correctly. However, there are mental aspects of trading that can undermine the hard work of the strategy. Some of these mental aspects include foreign exchange trading biases. It is important that you know what these behaviours are and how you can overcome them to be a better trader.
You Attention Span
Limited attention spans do not only cover people who are not able to focus one thing for very long. Traders who focus all their attention on a single aspect of trading also have a limited attention span. While new traders are told to only look at one or two trading pairs and a single trading strategy this does not mean that you should be oblivious to everything else. The best way to avoid this problem is by always looking for new information and keeping up a continuous education. By increasing your exposure to all aspects of the market you actually increase what you know.
Your Trading Regrets
No-one likes to feel regret and we all try and reduce the amount we feel. This is a common behavioural bias that people fall into after a losing trade. The trader will try and justify why the trade when bad instead of accepting that you lost the trade. The best way to avoid this bias is to have strict trading rules that you always follow. If you have these rules and the trade goes bad you can always find the exact moment that turned the trade. When you are able to do this you often find that it was something you could not predict or a flaw in your plan which needs to be rectified.
Overconfidence is a behavioural bias that manifests in two very distinct ways. The first is overconfidence in the information you have and the second is overconfidence in your ability to act on the market. The first manifestation affects all traders as no-one wants to believe that they have bad information. The second manifestation can affect foolhardy new traders and more often experienced traders.
To overcome this bias you have to verify all the information you have and be realistic about your abilities. If you are working off a tip on the market you should turn to technical analysis to verify that this is correct and identify all your entry and exit points. You should also keep in mind that you are human and not perfect. This means that you will not be able to react correctly to all trades and information.
While trading trends is a valid trading strategy you should never chase a trend without doing research. Most people are able to identify a trend on a chart given enough time. This does not mean you should start trading on it because you found it. When you feel you have identified a trend you have to look for technical patterns and indicators that tell you what you are seeing and how you should be trading.
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