The adverse trading bias that may be limiting your trading potential

Trading can seem contradictory. To those looking in from the outside it might seem to have a strong gambling element, but of course a gambler’s approach is anathema to the professional trader. You learn a little more about trading and then realize that trading is about discipline and that capital preservation is the principal concern, and only then capital growth. “It’s the trades you don’t take that are key to your capital growth”, is a mantra that amateurs are encouraged to bear in mind. Just when you’re getting your head around that you may then hear that being too cautious is equally counter-productive. It can all seem confusing. Well, the truth is that it’s not, because if you’re able to develop a good sense of discipline in your trading then it literally becomes a ‘no brainer’, i.e. you don’t have to think or worry about whether to take a set-up or not. If a trade fulfills a set of rules that you have developed as part of your trading strategy then it’s there to take, equally if it doesn’t then you leave it. There is no shall I, shan’t I... Your trading strategy determines it for you.

It’s natural, for most of us, to approach uncertainty with caution, particularly with regards to money. We are hard wired to be cautious about money and fearful of losing it. For those new to trading it seems to be an area wracked with uncertainty and so not surprisingly it is natural to be very cautious. While caution is an excellent trait in trading, it becomes counter productive when it leads to indecision and not placing trades for fear of losing.

It’s therefore important to work out if a fear of losing is actually affecting your trading. A well kept trade journal will reveal all where, amongst other things, you carefully note the reasons why you took or didn’t take what appeared to be a potential trade setup. If your notes reveal indecision or uncertainty too often then it’s likely you’re sense of caution is getting in the way of your trading. This, of course, does not mean that you declare open season on any trade that looks vaguely like it might be going in the direction you would like, far from it. It’s simply that your carefully planned trading strategy, which will have been thoroughly back tested, dictates to you whether a trade should be taken or not. In effect, the decision is taken out of your hands.