Have you ever been in a situation where you believed a trade setup was invincible and would become a sure winner?
There are many biases within trading psychology, overconfidence being one of them. Unfortunately, the reality is that no trade can ever be considered a certain winner.
Please don't get discouraged… this article will explain how you, trader, can dismantle the bias.
How to Handle Trading Bias
There is nothing wrong with having confidence in a trade setup. In fact, it could even help your trading as long as it doesn't distort your reality. The main problem arises when traders become attached to trades, analyses, or potential setups, which has already been explained in How to Dance Away Your Trading Bias.
It is important to realise that traders can never (fully) remove their bias as it is a natural by-product when looking at the charts. In a way, it's a step needed to perform analysis and stick to the trading plan.
To keep your trading bias in balance, I recommend taking these factors into account:
- Traders should try to understand the origin of their bias. Is it from the chart, the trading plan, or an unconfirmed rumour (in my view, the first one is better). Make sure to use a consistent approach.
- Realise that the market can move as it wishes. There is no such thing as a guaranteed win, everything is a probability.
- Update your analysis to make sure that it's in sync with the current market moves. Try to view the market from a neutral perspective, pretending you do not have a stake involved in the outcome.
- Use invalidation and confirmation levels. It is easy to trick yourself into believing that the market is still aligned with the direction of your trade. Setting up pre-determined levels that either invalidate or confirm your analysis (hence, the bias) are the so-called wake-up calls. They are the lines in the sand that you should not ignore.
Here is a useful 5-minute video which explains how trading is about trapping the market, not chasing it.
Live Example of Adjusting Analysis and Bias
Let me show you a real example from my own trading experience that implements the tips mentioned above.
Back in the first quarter of 2017, I expected the EUR/USD downtrend to continue towards 1.00 (parity), or below.
Source: EUR/USD Weekly Chart from 2015 to March 2017, MT4 Supreme Edition
Here is what I saw at the time:
- The price completed a contracting triangle chart pattern after a strong bearish momentum.
- The price broke below the triangle pattern and recently made a new low at 1.0340.
- The bullish price action seemed corrective and could fit well within a traditional break-and-pullback scenario.
The next step was to set up my invalidation and confirmation levels. My confirmation level was the break of the bottom at 1.0340, whereas the invalidation was officially 1.13. A break above 1.10 would already seriously reduce the chance of a bearish trend.
As you can see, my long-term bias was bearish on the EUR/USD currency pair, but this did not hinder me from updating my analysis regularly. I also set up clear levels that were my wake-up calls, e.g., a bearish break of 1.0340 and a bullish break above 1.10 and 1.13.
Source: EUR/USD Weekly Chart from May 2015 to August 2017, MT4 Supreme Edition
- The EUR/USD failed to break the bottom. In fact, it even failed to break the support trend line (blue).
- For me, the first major warning signal was the second higher high (purple box) indicating a trend because higher highs and highes lows on a weekly chart are important.
- The chance of a downtrend decreased the most when the price broke through the 1.10 round level resistance (orange line).
- Last but not least, EUR/USD invalidated the entire bearish trend when it pushed above 1.13 (red line).
How did this approach help me?
First of all, it saved me from taking unneeded bearish setups above 1.09-1.10.
Second of all, and perhaps much more importantly, my bias did not block me from trading the new uptrend that took the price all the way from 1.10 to 1.20.
- Access to the markets with very low fees;
- The best technology on the market – MetaTrader 4 Supreme Edition.
Cheers and safe trading,