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Control your biases

The biggest disadvantage a trader has is being human. By this we mean we suffer from emotion. It cannot be helped and we need to work hard to correct this deficiency when we trade.  These emotions do nothing but confuse us and get in the way of sound logical trading decisions.  As humans we have developed biases a predetermined view of how something will act. The bias can be personal and sometimes unreasoned judgment.  One bias we all often get is feeling that something has to work just because it worked once before and closing our minds to new information once we have formed an opinion. 

Preconceived Direction
The most common bias is preconceived market direction. For example many people are born and raised as bulls. Since the first time we learned to understand money we have been told that the market has always gone up and always will go up.  Investment counselors tell this to people all the time.  

When you hear one of your friends talking about the market or a stock you never hear them talk about being on the short side. Most of the time they are talking about a stock they just bought that is going to go to the moon baby. Rarely do they say I just shorted XYZ because the chart has broken down technically. When people are at a party debating if it is time to 'get in' the market they never debate whether they should be long or short the assumption is always long. 

Many people do not even know that you can short a stock or the market and make money when stocks go down.  If you told 10 of your closest relatives or friends who do not trade for a living that it is possible to make money in the stock market when stocks go down they probably would not believe you.  I have tested this theory a few times and if your results are like mine I'll bet 9 out of 10 people you ask would not know what a short sale is.  This is because the public has been brainwashed into thinking that the stock market only goes up.  They put money into an account they buy some mutual funds and they look at their statement once a month. Over time they hope to earn a nice gain. The thought is The stock market is supposed to go up how can I lose over time Well those that invested with this logic in 2000 found out the hard way that markets do not always go up. 

So many people have a bull market bias. This often carries through to the extreme that people will feel that every pullback is buyable even when that pullback has turned into a full fledged down trend.  This happened a lot in 2000.  If you asked people 6 years ago when the NASDAQ was at 5000 where the NASDAQ would be in five years I am sure 99 out of 100 people would have answered that it would be higher than 5000. Would anyone have believed that 6 years later the Nasdaq would be lower This is because of the preconceived biases. Yet the NASDAQ today is more than 50% lower than it was six years ago. 

Timing the Market
Those people that say it is not possible to time the market are wrong. Think of all the money they would have saved if they had gotten out of the market or went short in the year 2000 and stayed out or short for the next 3 years until 2003. 

The people that read the charts of the indices as they were rolling over were able to sell and get out of the way saved a ton of money. If they reversed their positions to the short side they would have made a ton of money over the next 3 years following 2000. 

What did the professionals do during that period They make a living trading so they went to work every day even though the market was falling.  Did they go three years without making a trade No they did not stop trading just because the market was going down. 

Did they trade long against the trend I doubt it because they knew that would be a losing proposition.  They still went to work and they traded short.  The bottom line is that the professional does not care which way the market goes. They have eliminated the bias.  They simply use the market as a vehicle to make a living.  In order to be consistent and make a living trading you have to trade with the trend and never against it. 

Get a Handle on Your Biases
Bullish biases have always been a problem for most new traders or investors.  Education is a key defense. Have a trading plan that is structured to not allow last minute biases and confront biases head on. Ignore your biases and follow the chart pattern of the stock you are trading. 

For example I may think or want XYZ to go up 50% in the next year. But if the chart turns against me I will ignore my bias to the long side and I will sell the stock no matter how much I want or hope I am right about the 50% gain. 

When you hear someone talking about the market and where it is headed ask them to sit down and write out on paper all the reasons why they think the market or a stock is going to go up over the next 5 years.  When they are done you will probably not find any technical value

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