Many people love foreign exchange trading and want to make money in the foreign exchange market. They have learned a lot of trading techniques, followed the orders of many analysts and attended some technical training, but they still lose money in operation. They are confused, puzzled, unable to find the reason, and unwilling to give up, so they read articles everywhere.
Cheer up, this article is not about technology, first to guide you to the truth of foreign exchange trading fluctuations, before you really don’t play.
Many traders subconsciously equate investing and trading with “gambling,” hoping to easily earn 50 percent or even 100 percent more each year.
Yet even the likes of Warren Buffett and George Soros earn, on average, little more than 20% a year.
This is a classic lack of awareness.
In trading, only when you have a clear understanding of the market, the future and yourself, can you constantly overcome the weakness of human nature and finally achieve stable profits.
A large proportion of people who trade for a small profit or lose more money fall into the trap of cognitive bias.
Cognitive bias is just one of the more common biases, and to avoid falling into these pits, you need to know where the pits are.
01 10 Deep Reasons why retail Investors Always lose money 1. Prior bias The first “pit” is the prior bias.
Traders rely on some historical experience to help them understand and predict trading events, and rely too much on these imperfect prior conclusions.
Common wisdom among traders, such as the belief that the market can never fall indefinitely and the belief that “the market is your friend,” is simply a matter of convenient transcendentalism.
But, unfortunately, these transcendentalism does not stand the test of the market.
In times of market uncertainty, traders tend to cling to such transcendentalism.
Once or twice may be lucky to make a profit, but in the end it is inevitable to lose money.
2. Attribution bias The so-called attribution bias, that is, if you do something successfully, you will think that you have strong ability, while if you fail, you will blame external factors or bad luck.
The attribution bias has only a negative effect on trading, and it’s not uncommon for this to happen, as in Friday’s May US non-farm data, which surprised everyone and made all analysts wrong.
Therefore, the author saw a lot of people who lost money began to blame analysts.
Leek is the biggest characteristic is in the bull market to make money, think they are very strong, and when the bear market losses, began to scold the banker, scold the economic situation, is only don’t blame yourself.
In fact, the investment decision is made by each trader himself, and the biggest responsibility for the loss lies in himself. It may be that you collect information with bias, you may also understand the information is not in place, and even the investment operation is irrational.
The best people constantly improve themselves and don’t waste time complaining about others.
3. Bandwagon effects Bandwagon effects happen every day in markets.
Because of the asymmetry of information, traders tend to infer information they do not know by the behavior of others in the market, or even simply follow the decision of others to place orders.
Scariest of all, the most important factor in conformity is not whether the opinion itself is correct or not, but how many people agree with it.
Individual irrational behavior leads to collective irrational behavior.
This is often referred to as herding, where individuals choose to act in the same way as others, regardless of the information they have.
4. Framing Effect Framing effect is when people react differently to a particular choice when presented differently.
The specific performance in trading is that when early liquidation can bring definite profits to the trader, the trader is often unable to hold the position and chooses to close the position in advance.
In the event of a loss, traders often fail to take a stop loss as planned in the hope that the market will reverse. This is because the certainty of a stop loss is more difficult for traders to accept.
For most traders, the framing effect is a barrier to letting profits run wild.
Because for the low-frequency trading strategy, the necessary condition for profit is to be able to hold the profitable list and make profits running when doing the right direction.
The bias towards deterministic returns caused by the framing effect is the trader’s enemy.
5. The gambler’s fallacy The gambler’s fallacy is the belief that a trader who has experienced a series of losses mistakenly believes that he has a higher probability of making money on his next trade.
However, each trade is an individual trade, and your next trade has nothing to do with previous consecutive losses or gains.
At this point, the right thing to do is to stick to your trading strategy and not change it because of your miscalculation.
People who fall into the gambler’s fallacy have three characteristics: firstly, they like to make decisions by tapping their heads and acting on their gut;
Two, blindly firm in their own ideas;
Three, fall into this misunderstanding, if his idea in a trading center fluke right, will strengthen their confidence in their own, even feel that they have been very good.
If that wasn’t clear enough, there’s a more crude way to tell if you’re falling into the gambler’s fallacy, simply by noticing if you say something like, “The market has been going down so long, isn’t it time to go up?”
6. Hindsight bias, that is, after an event happens, we will mistakenly believe that the outcome of the event is predictable, which will lead traders to be blindly optimistic about their trading ability and inevitably fail.
This phenomenon is also common among traders.
After every rally or crash, someone can always sum up some good and bad.
When looking back at previous trades and wondering why they lost money, it is easy to see why, even if the reasons were not clear before the trade.
Many traders treat it as a callback, but it’s not.
Finding out why the market is going down or up after the fact doesn’t help the rest of the trade, because it’s impossible to tell beforehand.
The right thing to do is to reject hindsight and hold markets in awe.
7. Acceptance bias Acceptance bias is a terrible thing. Once a trader has formed a preconceived opinion about an event, even if his opinion is not very clear, it is difficult to overcome his bias.
Moreover, this kind of mentality may also affect the trader’s view of a certain person and a certain kind of trade, and the identification bias may affect the trader’s decision invisibly.
For example, many traders fall into the trap of acceptance bias when trying to determine whether a particular technical theory can successfully predict market movements.
8. The cognitive bias of overconfidence is well understood in its literal sense. For many traders, overconfidence is a deep-seated bias.
People with this bias always have a higher level of confidence in their abilities than objective levels.
One of the magical things about trading is that 90 per cent of traders feel they are better than other traders.
Overconfidence can lead to two things: one is to handle too much money, taking on risks they can’t afford;
Second, because too believe in themselves, the result of death carry losses, and eventually may even explode.
Especially for beginners, overconfidence often results in more leverage and more damage.
We need to be confident, but not too much, and we need to be objective.
This requires always thinking on the risk side, thinking about the cost of failure before placing an order, rather than how much money you can make.
9. Confirmation bias refers to the tendency of traders to choose information that supports their views and to ignore negative information.
A trader with this bias will often make the mistake of going long gold at a certain point and then searching for information that supports his view, naturally ignoring information that contradicts his view.
This cognitive bias is common among new traders, such as when you are very bullish and decide to go long on an asset, you can always find reasons to convince yourself.
In severe cases, when faced with trading losses, they are still unwilling to accept the facts, but continue to look for evidence to support their views. Ten cows can not pull back.
10. Availability heuristic bias Many times, traders make unconscious, emotional judgments.
The easier something is to think about, the more likely it is to happen. This is called the availability heuristic.
People with this cognitive bias tend to be affected by recent events.
They become overly focused on recent trading results (either losses or gains) and can influence future trading decisions.
For example, when making trades, such traders tend to focus first on the point or variety that has impressed them more recently.
For example, when many people choose stocks, they will give priority to those familiar stocks recently, such as the stocks of a certain theme that has been hot recently.
The reason is that these stocks have already impressed them, which is a common example of the availability heuristic bias.
These 10 cognitive biases are common in daily trading and are the underlying cause of many people’s losses.
To sum up:
The foreign exchange market is the fairest financial market in the world, but it is also the market that tests human nature the most. The weakness of human nature is clearly exposed here, and it is better to test your human conduct here. After entering the foreign exchange market for a period of time, you will find that you are a stupid and reckless man who can’t get through the disappointment and give up.
His heart has been comprehensively cultivated, and his mind has been greatly released. He is about to have a great life. He has done well in this inhuman place, and nothing in the world is difficult for him.
