Today's Quote: “General notions are generally wrong.” Lady Mary Wortley Montagu.

Without a question, the biggest disadvantage we have as traders is being human. Along all the good things come some really bad things for traders. We come with emotions that do nothing but confuse us. We have hidden demons that we don’t even know are operating. Also, whether you realize it or not, as you developed as a human, you develop ‘biases’. A predetermined view of how something will act. Webster’s defines bias as “a personal and sometimes unreasoned judgment”.

There are many types of biases that people develop. There are many names for the different biases. Maybe you recognize some of the symptoms. Such as feeling that something has to work just because it worked once. Closing your mind to new information once you have formed an opinion. The list goes on and on, and it is well worth your time to read in some depth about some of these psychological topics.

The most common bias is a preconceived market direction. Many people are born and raised as bulls for example. Since the first time we understood money, we are told that the market has always gone up, and always will go up. Brokers tell us this every day. When you are sitting around the water cooler and someone discusses their portfolio, do you ask if it is ‘long’ or ‘short’? No, of course not. We assume it is long. If grandpa opens a stock portfolio as s college fund for little Bobby, do we ask if it is mostly long or short? When people are at a party debating if it is time to ‘get in’ the market, are they debating whether that should be long or short? Never. The assumption is always long. Many people do not even know that you can ‘short’ a stock or the market. Think about the implications of that.

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. Some people will view every 2 and 5 minute chart with a bullish bias, even though the outlook for the next 100 years (even if it is correct) will have very little to do with what happens the next 15 minutes. Some people cannot even “see” patterns that involve shorting, even though they “see” the exact same pattern on the long side.

There are many other biases. Almost all people who come to the market are successful at their last endeavor. They have the money to trade, or at least have enough money to consult with someone on what to do with it. This is itself is a problem. What was self confidence in a prior life becomes stubbornness in trading. What was success in a prior life becomes the inability to handle losses in trading. Many top professional, doctors, lawyers are actually trained for years to do things that hurt their ability to trade.

The problem is that most of the time we do not even know these biases are within us, or working against us. Education is a key defense. Become aware of the symptoms of many of these, and learn to recognize and deal with them. Have a trading plan that is structured enough to not allow last minute biases. Confront them head on. Consider writing a full page on where you feel the market will be one and five years from now. Of course, there is no technical value in doing that. No one knows where the market will be that far out in the future. However, this goes a long way to expose what your bias is, so you can be aware of it and deal with it on a day-to-day basis.