How to Remove Bias from Trading

During analysis and trading it is quite easy to fall in an ‘invisible trap of confirmation’ and it happens to every single trader on earth. That sounds fancy but the principle is simple. Let me explain by asking you these 3 questions:

• Have you ever absolutely loved a trade setup before you entered the market?


• But after exiting the trade, you suddenly started to dislike it more and more?


• Or maybe you even disliked it during the trade or just after the setup?

Did you indeed answer ‘yes’ to the above questions? Has this situation ever occurred to YOU? Let us know down below!

If you did answer ‘yes’, then do not be alarmed because this is normal. In fact, it occurs to almost all traders… And if it has not happened to you yet, then pay attention closely because odds are high that it will – sooner than later.

CONFIRMATION BIAS EXPLAINED

Our brains naturally and automatically seek confirmation of our bias (for longs or shorts on the pair). Any ‘neutrality’ disappears when a trader is convinced that the short or long is a great trade setup and the trader only sees confirmation. Here is an example of how the process works:

‘Trader John sees the GBPUSD. Price is bounding off of a support. He already expected price to respect that level. Oh no, it has moved another 10 pips. And the hourly has bullish candles as well. I must take this long – NOW – before it’s too late.’

In other words: prior to taking the trade, the setup looks invincible and nothing can stand in the way between the trader and the profits. Other traders might be (more) realistic in their outlook of a trade but give the ‘benefit of the doubt’ to their trade setup and still ‘give it a try’. It is very interesting though that once a trade is on the way, traders suddenly see the chart from a different perspective. The trade setup looks worse, more dangerous and in some cases just plain awful. Why? What just happened? Why was a trade that was entered a minute ago suddenly so different?

Let me explain why: the mind. Our minds prefer to seek confirmation of our analysis. Once traders have a trade setup in vision, the mind will focus on finding confirming arguments. The rosy colored glasses are only removed when a trade has been entered or if the trade is not going our way.

So yes be prepared, our minds are going to ‘trick’ us to believe that our analysis is correct and it will look for more and more confirmation until we hit the boiling point and just ‘click’ the button to either buy or sell.

What can we do to make our analysis with less bias and a better reflection of reality?

SOLUTIONS

The first solution to this challenge is by implementing a solid edge via rule based strategy and trading plan. The rules in the plan provide traders with confidence and a road map when to enter and exit appropriately (when the rosy glasses are weakest). The strategy we use in our WET trading room is the StrikerTrader: clear, simple and easy to follow. Sustainable profits are a matter of following the plan and not guessing what price will do at ever single point.

The second solution is to set up confirmation criteria of our analysis and wait for price to meet those criteria before trading. A trader cannot fully remove a bias when the trade setup is coming closer to entry point so that is why setting up confirmation points of the analysis is useful. By doing so, traders establish clear and logical events (candle stick patterns, break through or bounce at trend line) which helps traders from entering and exiting inappropriately due to the confirmation problem.

The third solution is using the TOFTEM model when approaching the Forex market. By deliberately focusing on various steps of the model, the trader is forced to look at the currency pair in a different angle than usual, which stimulates the critical thinking prior to entering and exiting the trade and decreases the ‘conformation’ bias traders tend to have.

What do you think of the solutions? Are there are methods you use to keep your focus?

Thanks for sharing and Happy Trading!

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The Loonies Last Stand?

via MarketPulse:

The IMF yesterday maintained its October forecast for the Canadian economy to grow 2.2% this year, and this despite world growth improving. The static forecast has pushed Canada down the pecking order by one notch, to third amongst the G7 members. The US and the UK are expected to lead the way. It’s supposedly a temporary blip, as the IMF expects Canada to regain that coveted number two-spot next year, predicting that the Canadian economy will grown by 2.4%.

In Q4 last year, the IMF maintained that the Bank of Canada’s monetary policy remained “appropriate,” and it expected “gradual” tightening to begin in the early part of 2015. That prediction may be a tad aggressive as low inflation has become a matter of concern for Governor Poloz at the BoC. CPI in Canada has remained below that psychological 2% inflation benchmark for a year-and-a-half. Last November the governor happened to drop the BoC easing bias that was inserted 12-months prior by the current BoE head Mark Carney. The long held rate hike omission has allowed the currency to free-fall to a new 52-week low against its largest trading partner, the USD. On the crosses, it too has suffered, but obviously not to the same extent as with its closest neighbor.

Later this morning the BoC is widely expected to keep its policy rate steady at 1%. The real question is whether policy makers are willing to keep their neutral bias or become more dovish. The 6% depreciation outright since the omission in Q4 would suggest that the currency has already priced in a strong percentage of “dovishness.” Policy makers would be the first to admit that the weak CAD is already benefiting various sectors of the Canadian economy. If so, there really is no need for the BoC to rush out and change their stance to an easing bias just yet. Under this scenario, it would likely benefit the CAD bulls, temporarily at least, as a BoC absence should encourage some short CAD covering. The streets majority expects the BoC to maintain the same tone.

Governor Kuroda at the Bank of Japan kept monetary policy steady overnight and maintained its upbeat consumer inflation forecasts, encouraged by signs that a broadening economic recovery may encourage firms into spending more on wages and investment. As widely expected, the BOJ voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of ¥60-70 trillion. With the BoJ standing pat on policy initially had JPY strengthening and the Nikkei falling, but a slight downgrade of the 2014 forecast, and expectations that CPI at 1.9% rather than 2% in 2015 was capable of reversing some of the JPY initial strength outright due to the possibility of further policy easing eventually coming down the pipeline.

This morning’s MPC minutes for Jan 8-9th revealed that the BoE officials agreed this month to keep the UK’s central bank interest rate at a record low even after the unemployment reaches their 7% goal. Officials see no “immediate need to raise the Bank rate, even if the 7% unemployment threshold were to be reached any time soon.” When its time to raise rates, MPC members agreed it would only be appropriate to raise the central bank’s main interest rate “gradually.” Carney and his fellow members have misjudged the pace of employment. A faster than expected UK recovery has meant that unemployment has fallen far quicker than policy makers anticipated. This morning’s UK jobless numbers averaged 7.1% in the three-months to last November, and just above the original threshold level that Governor Carney indicated that UK were to hike. However, the UK’s quickening has been accompanied by the “cooling” inflation – this has allowed Carney and company to ease their foot off the higher rate pedal and maintain there easy money stance.

Investors diverging rate outlook happens to have the 18-member single currency trading at fresh one-year low against the pound today. If you set the hawkish BoE minutes from today, up against the dovish January ECB press conference, one finds reasons enough to favor the pound. From a technical stand point, 0.8160 has been a long time chosen target point for any techie, if and when breached it certainly opens a direct path to last years EUR/GBP low of 0.8087.

Other links:

Mighty Dollar Eager To Rally Further

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The Loonies Last Stand?

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