Cognitive biases and how to prevent them
Anyone who actively speculates on the market once encountered cognitive biases. They are quite common and affect especially novice traders, who don’t know about their existence when making transactional decisions.
Cognitive biases are a distortion in the perception of reality. It affects several important aspects of life, including behavior, emotions, views, and analyses. The list of cognitive biases is long, e.g. unwillingness to lose, freshness effect, the effect of drowning costs, the effect of disposition.
How can we prevent them? First of all, you need to develop a strategy tailored to your personality and consistently use it. Try not to fall into the whirl of your thoughts, emotions, and needs, try to calmly assess the situation you are in. Ask yourself: “Is my action completely rational or is it a consequence of emotional needs?” It can sometimes make us realize that our thinking is far from rational. And finally, maintain a transaction log and analyze your position after the transaction. Select a set of transactions, e.g. from the previous month and repeat this process after each period. By analyzing the position after it’s closed, you will no longer be emotionally attached to it, which may help to identify the motives that have occurred during the trade.