7. Bandwagon effect

In general: The training effect describes the phenomenon where the probability that some people accept a belief increases based on the number of people holding that belief.

This means that if many people share a certain belief, even if it is a false belief, it is more likely that others will agree and also accept the ideas or assumptions of the group.

In trading: If you are part of a trading group, read threads on trading forums or just exchange ideas with other traders, you are more likely to think that the trading ideas will be correct.

Being part of a trading team can be very helpful, but the only goal is not to get a confirmation for trading signals.

6. Herding psychology

In general: Herd mentality explains the impact that people tend to get together, especially in times of uncertainty or when situations get tough.

If you are faced with a difficult decision or faced with a situation that you cannot explain, you will often seek out others and imitate their behavior.

Your argument is that a group, especially a large group, cannot be wrong or fooled so easily.

In trading: There are two negative effects on traders that exist through herding behavior.

First, herd mentality may be the reason for the creation of financial bubbles. As more and more people talk about a certain investment (like the last GameStop drama), people tend to believe it's a sure thing because the crowd can't be wrong.

And second, if traders don't understand the development of the market or of a transaction, they will gather together to come up with certain random explanations or just agree that the market is unpredictable strange, and absurd.

This ignorance and delusion will lead to further bad trading decisions or blame the market instead of facing your own mistakes.

5. Information bias

In general: Confirmation bias describes the tendency to seek confirmation while not changing the outcome of a given situation - more information is not always better.

In trading: Confirmation bias plays a very important role in a trader's life. When traders encounter losses, they believe it is their fault but can prevent them from falling into losses next time.

As a result, this trader will go out to buy books, read on daily and weekly trading forums and watch non-stop trading webinars with the aim of gaining more knowledge on "how the market and trading work".

But in reality, losses don't happen because a trader knows too little. It is confirmation bias, which is the main reason for jumping from system to system and the endless quest for the holy grail in trading.

4. Ostrich effect


In general: The ostrich effect describes the phenomenon of ignoring dangerous or negative information by burying its head in the sand, like an ostrich.

Smokers are a prime example of the ostrich effect when they ignore the fact that smoking causes cancer and many diseases - even when faced with gruesome pictures of the outside of a cigarette pack. 

In trading: When traders find themselves at a loss, but can't accept that they were wrong, they turn themselves into an ostrich.

To try to outperform the market and turn a losing trade into a winner, traders will often try to average down, i.e. add new positions to the losing trade - a recipe for disaster.

Another common ostrich mistake is to extend the stop loss (or remove it altogether) to delay the realization of a losing position in the hope that the market may turn in favor of the trader. surname.

3. Outcome bias

In general: Outcome bias describes the fact that people often judge a decision based on the outcome, not how the decision was made.

If you win a lot of money gambling with all your net worth, that doesn't mean it's a wise move.

In trading: Outcomes bias is a very dangerous effect for traders because it can lead to false assumptions about how trading works.

If a trader abandons his trading plan and makes a random trade based on hunch or pure speculation, but finds himself in a winning trade, he may believe he You don't need a trading plan and still develop some idea of ​​how the market moves. While in reality, it was purely luck.

Therefore, never deviate from your trading plan and always follow your trading rules.

2. Overconfidence

In general: Overconfidence describes the phenomenon in which some people are overconfident in their abilities, which causes them to take more risks in their daily lives.

In surveys, 84% of French people estimate that they are better than average lovers (Taleb). Without the overconfidence bias, this number is exactly 50%.

In trading: It doesn't matter where you listen to traders, you will always get the impression that 99% of all traders are amazing millionaires, manipulating the market up and down; when in reality less than 1% of all traders can make a profit.

In a 2006 study, researcher James Montier found that 74% of the 300 professional fund managers surveyed rated their performance as above average and almost 100% believed that their performance was above average. their work is equal or better than average.

1. Self-Enhancing Transmission Bias

Overall: The self-advocacy bias explains the effect people prefer on success over failure. This leads to a false perception of reality and an inability to accurately assess situations.

While it's clear that most people aren't as high achievers as Tiger Woods, Mark Zuckerberg, Bill Gates, or Elon Musk, average people won't talk about their failures and why they're stuck in life.

In trading: Traders love to talk about their wins constantly but downplay their losses. Losses are ignored because traders assume they have unfair conditions, such as a bad day or a minor inattention, that could be easily avoided (in theory).

Traders who focus on mistakes are the ones who can improve their trading much more effectively by correcting their shortcomings. But a trader who is unaware of his or her own weaknesses will not find it necessary to correct them, so they will never improve.

Conclusion: People are not made to be profitable traders trader

Psychology and research show that humans are not made to trade and second, our belief systems can be used against us, by shrewd marketers.

Being aware of how your brain works when trading is an important factor on the road to becoming a profitable trader and it helps you avoid some of the most common trading pitfalls.