It is tough to trade. What is tougher and often overlooked is the process of taking the trading decisions. Yet, we do it in spades.
We have tried to reduce some of those decisions by screening the scripts/stocks to trade. Yet, that introduces us to a set of biases that further affect the decisions. Here are some of the those:
- Availability Bias: We only consider stocks screened by our trading system.
- Confirmational Bias: We categorically trade on the setups as filtered by the screener. For example, shorting stocks appearing in bearish screeners and buying stocks from bullish screeners.
- Historical Bias: We take trading decisions based on our past experiences, or past performance of the stock.
- Outcome Bias: We take trading decisions based on our expectations of the outcomes. We want certain outcomes, we want to avoid certain outcomes.
- Emotional Bias (optimism and pessimism): We take trading decisions based on our mood. For example, bullish when elated and hopeful.
- Directional Bias: We take trading decisions based on the direction of the index.
- News/Noise Bias: Trading under the influence of the news and recent developments.
- Routine Bias: Trading as per the movements of the clock. Prioritizing some market hours over the others.
- Impressional Bias: Making decisions based on the general notions imprinted in our memory. For example, when the VIX is high, we buy; when the VIX is low, we go slow, etc.
- Opinion Bias: Trading decisions based on formed opinions of self and market gurus.
- Information/misinformation Bias: Trading decisions based on the extra information available. For example, technicals, financials, or fundamentals of the stock.
- Calendar Bias: Trading decisions based on the financial calendar and days of the market. For example, earnings, expiry, etc.
- Monetary Bias: We take trading decisions based on the availability of funds, previous P&L, etc.
All these biases affect our decisions, behavior and outcomes of our trades. More in the next article.
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