4 Mistakes That Cost Traders A Lot Of Money And How To Fix It

As we all know, emotions and psychology play an important role in trading and are often the main cause for trading failure. In our Edgewonk trading journal we included a set of unique features and metrics that not only analyze the impacts of psychological biases, but also shows you exactly how to overcome these problems. In the following article we introduce the 4 most commonly observed psychological biases among traders and how Edgewonk helps you with overcoming these obstacles.


#1 Loss aversion and disposition effect

These two biases are common mistakes that cost traders a lot of money and often their whole trading career. Traders exit losing trades too late hoping that trades will turn around and still become a winner. Usually, these trades result in large losses, way beyond the original plan. The disposition effect describes the phenomenon that traders sell winners early to realize the profit, while not cutting losing trades fast enough.

Overcoming loss aversion and the disposition effect

The Edgewonk trading journal analyzes your trading behavior in detail. Whether you are regularly widening your stop loss orders to let losers run or close your winning trades too early, Edgewonk will show you the negative impacts on your trading performance so that you can see how to improve your trading.

Look at your R-Multiple in the Trade Analytics and compare winners and losers. And also consult the Trade Management to analyze actual vs. potential performance.


#2 Self-attribution bias

This bias describes the effect that traders attribute successful outcomes to their own abilities and blame external factors for their losses (algos, insider trading, HFT, news, etc). The self-attribution also results in overconfidence during winning streaks and careless trading in losing streaks.

How to overcome the self-attribution biasTo overcome this bias, an objective perspective and a neutral performance evaluation are necessary. The built-in Tiltmeter prevents you from screwing up in a losing streak. Whenever you repeatedly make bad trading decisions, your Edgewonk trading journal warns you immediately. The “keep it green” challenge is the first challenge in our trade development course for a reason. 


#3 Outcome bias

The Outcome bias describes the fact that traders judge a decision based on the outcome, rather than how the decision was made. If traders win a lot of money by risking their whole account on a single trade, it does not mean that it was a good thing to do. The end does not justify the means.

Overcoming outcome biasNot all losing trades are bad and not all winning trades are good.  Edgewonk uses the unique comment and tag function that allows you to assign individual comments to your trades. Our customers report that they use comments such as:

Positive comments: Good entry, stuck to the plan, did not break my rules, good exit, etc.Negative comments: Entered too early, entered too late, exited too early, broke my rules, trade not in trading plan, etc.

Afterwards, you can analyze the impacts of your trading decisions (based on your comments) and see how negative or positive trading decisions impact your trading performance.


#4 Hindsight bias and regret

Hindsight bias is common and it’s a very painful bias for traders who look back on their closed trades (or missed opportunities) and then, with the benefit of hindsight, see what they should have done and where they missed out.

“If you convince yourself that you saw the market move in advance and you see that you didn’t participate in the move, the dissonance between what your profitability should be and what it is leaves plenty of room for self-recrimination. Out of this regret, traders often feel pressure to make up for the “missed opportunity”, leading to overtrading.” Dr. Brett Steenbarger

Overcoming hindsight biasTo overcome hindsight bias, a look at your Edgewonk potential performance can help you soothe your nerves. When your potential performance and your actual performance are close together, there is nothing to worry about. If simultaneously your Edgewonk Tiltmeter reports that you haven’t broken your rules or made bad trading decisions, keep calm and keep on trading. When your potential performance is much higher than your current performance, check the other Edgewonk statistics for clues how to improve your trading. The Simulator will also help you understand drawdowns in a better way and it shows you how long term expectancy plays out.


Conclusion: Quantifying emotional impacts to overcome biases

ƒEdgewonk is built from traders, for traders. We zeroed in on the common problems that cost traders the most money and which are the main cause for trading failure, developed ways to analyze and quantify the impacts and then built metrics and functions that allow you to overcome psychological obstacles and biases.

A big part of trading successfully and improving as a trader is being able to really see where your mistakes are, how much you are losing and how your performance could look like. Personalizing Edgewonk to analyze your own weaknesses and then having our features tell you how you are really performing can be an eye opener for many traders and the starting point for a better trading future.

Cover Image: https://unsplash.com/search/lightbulb?photo=yIW287G3_U0

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