A reader asks a good question: "Do you have any good post on eliminating a strong bias? I am so clouded by a bias, I can't trade objectively."
I find this to be a more common problem than is typically acknowledged, particularly among short-term traders who hold positions intraday. They find themselves caught up in strongly held, longer-term opinions about political and economic developments, which makes it difficult to trade against those views.
For example, it is very difficult for an advocate of limited government/individual liberty/free markets (which, parenthetically, are different from the kind of statism represented by the last Republican administration and the current Democratic one) to feel particularly bullish on the future of the U.S. or even global economies. While I have philosophical sympathy for such a perspective, it doesn't change the fact that markets tend to rise during periods of central bank ease. Fighting the Fed is generally not a good way to make a money as a trader or investor.
Too, some traders naturally fall into trend-following or countertrend trading styles. While either of those can be successful, becoming married to trends or fighting strong ones can be a quick way to the trading poorhouse. The opposite of being stuck in bias is being mentally flexible: recognizing when trends are likely to continue and when they are vulnerable to reversal.
Three practices help me sustain mental flexibility. The first is a thorough review of market indicators, intermarket patterns, support/resistance areas, value areas, etc. From the data, I require myself to formulate hypotheses about the action that I anticipate. By forcing myself to ground my views in the data, I try to minimize subjective bias.
The second practice that helps me stay mentally flexible is following a few basic trading rules. I am not allowed to sell a market that shows strong NYSE TICK and positive cumulative Delta (i.e., net volume at offer vs. bid); I'm not allowed to buy a market that shows weak TICK and Delta. In other words, because much of my trading is intraday, I'm not allowed to fight the intraday sentiment trend. At the same time, I'm not allowed to buy the market when TICK is positive or sell it when it's gone negative. I have to execute ideas countertrend, even as I try to ride a trend. In this way, I follow the market; I don't impose my views onto it.
Finally, a third helpful practice is framing all trade ideas as "what-if" scenarios. If the market breaks support on high relative volume and very weak TICK, I would do X. If the market's selling pressure dries up near support, I would do Y. Included in those "what-if" scenarios are plans for stopping out of a trade, plans for adding to a trade, etc. By requiring myself to look at bull and bear possibilities, I prepare myself for either.
No one--myself most included!--can eliminate bias altogether. The key is staying as grounded in markets as possible: listening to them, rather than talking at them.
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6 comments:
To avoid a market bias,especially the wrong one, have at least 3 charts with 3 time frames, or 1 of it is a different chart type. thus can see the action of price and indicators in these charts before any decision is made.
Dr. Steenbarger,
I recently watched a webinar of yours from a few months ago labeled something like "photon summer school class 7" in which you mentioned you are out of the market with your retirement account because you feel we are still in a bear market over all. I was surprised to hear it. I somehow got the impression you thought we were in a new long term bull market.
I was wondering then, do you think someone like Robert Prechter has it right that at some point there will be another big or prolonged move down?
Also, just a note: this blog post struck a chord with me. While reading Prechters latest comments yesterday I became conscious of the fact that not only do I think the market *should* move down, but actually deep down I *want* it to move down. To validate my thoughts on fiscally responsible government.
And yet I cant shake this nagging feeling that we are going higher from here.
I suspect its almost impossible to eliminate these ego induced biases completely, but its certainly incredibly humbling when you try. Ive found that when Im truly honest about my motivation for pretty much anything at all, it all, deep down, comes back to ego/value/self esteem in the end. Even this very comment Im posting here is partly, deep down, motivated by the desire to show that I have an understanding of the ego! ... What an impossible battle!
Have you read any Buddhism teachings? Or stuff from someone like Eckhart Tolle (A New Earth; The Power of Now; etc.). I think this stuff would be amazing for traders. Well, anyone actually. It seems the whole world is walking around completely full with long ago preconceived ideas, subtle biases, socially conditioned judgments on what is good and bad etc.
What fireman said was very interesting. I choose not to look at broad markets up or down but to focus on looking for things that benefit me by finding ways I can help or give back. For example there are people willing to network now that when they are doing well they "do not have time".
There are some areas that I think are going to do well so focusing on what I feel can work serves me better then looking for things that might or might now work like the broad market. I am also look at things like the values of building relationships and getting to know people as being more important for me than showing how smart I am to people.
Fireman I have read Eckart Tolle and find his works similar to Landmark Education and other Psudo Transedentalism works. Great reading.. well I have the new earth on my ipod. I am not sure I buy into all of the ego viewpoints he has though.
Eckart Tolle has a great agent and one of the other people he represents is a lady that I met named Allison Maslan www.myblastoff.com is her site. Eckart Tolle give too little application for my taste it reminds me of a less work than Landmark situation where it is all about being present only (almost).
Fireman, please do not take what I said as anything else than a compliment of your intelligence and deep understanding.
Visit my blog and see what you think - I love having people around it like yourself and Dr. Steenbarger around.
Best regards
Thanks Brett. Informative and helpful. I also believe that bias cannot be fully removed, but maybe as Mark Douglas writes, deactivated. It is a component that remains in existence, but does not contribute to or influence a decision making process. As so much in trading, easier said than done, but added to the checklist to ensure any bias perspective is identified, acknowledged and accepted. That said, it is not realistic to entirely sterilize your decisions from bias.
Fireman, that was very well said. I want to check those books out.
I don't want to avoid bias. If you can predict market then bias should be used to position size. Bias is everything to winning big. Bias is confidence. Combine confidence with objectivity.
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