Every trader from beginner to professional trader develop a bias in the market. However this help traders to understand the direction of the market. Sometimes traders expect price to rise. Meanwhile some traders expect that the price will fall from here. Every strategy forms the different bias. However 2 traders may have different market bias at the same time. That doesn’t create problem because they both are right according to their strategy. However the trouble rises when the trader attach themselves to the market bias.
Rather than accepting the market signals and changing their bias, they try to defend their predefined bias by giving the false facts. In the urge to proof their bias right, they tend to hold on to the losing trade. Developing the knowledge about this topic may help you understand the market dynamics more efficiently.
What Is Market Bias?
Market bias is the direction which tells you the price is going to rise or fall. However it is necessary for the traders because it helps trader to plan the trades accordingly. Meanwhile this helps trader to know where is the money is flowing and how we can catch them. Developing the market bias helps you to set the risk, limit the position sizing and lot sizing etc.
Types Of Bias
Bullish Bias: When the price rises continuously, it is referred as the bullish bias. In this scenario the traders plan for long position or long trades.
Bearish Bias: When the price continuously falls, it is known as the bearish bias. In this case traders look for short selling or interested in selling the asset.
Ranging Bias: Anticipating when the price trades between the last high and low. In is considered as the ranging or consolidating markets. In this case traders struggle to trade in any direction. Because the market doesn’t clear the direction in which it is going to move.
How To Decide Market Bias
Mostly traders develop their bias by aligning the fundamental analysis and technical analysis.
Higher Time Frame Direction: Every professional trader decide their bias by looking at the direction of high time frame. Most of time every time frame follows the high time frame trend.
Market Structure: Analyzing the price action like higher high and higher low in bullish trend. Lower low and lower high on bearish trend.
Fundamental Analysis: Having an eye on new events, social events, economic data release, interest rates etc.
Deciding the bias doesn’t affect your trading in the bad way. But attaching to the bias may does.
Why Traders Become Attached to Their Bias
Traders spend long hours on the charts to analyze the market structure or bias. They identify the patterns and on the basis of that they decide the bias and become confident about it. Over the time this confidence turns into the attachment. They start treating their confidence as the certainty in the market. When the market conditions changes, their mind didn’t accept the change.
Key Reasons for Attachment
How Bias Attachment Affects Trading Performance
When a trader attach themselves to the market bias, they forget to remain objective. Rather than accepting the what is market showing currently, they stick to the previous bias. However this lead to staying in losing the position for a long duration, ignorance the market signs. However they let their emotions drive their instead of rules.
Key Ways Bias Attachment Harms Performance
Anchoring heuristic: At the time of analysing the markets, trader decides the entry price for the trade. When the trades against them, this entry price forces them to hold the trade. Rather than cutting the loss, they stay in the hope of when the market will come at entry price, i’ll cut the trade at breakeven.
Confirmation Bias: When a trader decides their bias for the day, they often collects the data to justify their bias. As a result they ignore the warning signs of the market.
Escalation of Commitment: Traders often average out the positions which are in the loss. They do this because they want to prove their original analysis right at any cost. This causes the massive drawdown in the trading account.
How to Stay Objective
Staying objective in the trading require the detachment from the emotions and the outcome’s. In order to remove the guessing work from the trading, develop the unavoidable trading plan. Fix the per trade risk appetite and create a trading journal.
Actionable Steps for Objective Trading
Trading Plan: Rather than randomly pressing the buy and sell buttons. Develop the trading plan which acts like the anchor. Outlining the exact parameters for the buy or selling the trade, how long to hold the trade or when to book the profits.
Limit The Loss: Never risk more than the 2% per trade of your total trading capital. Always measure your trading results on the basis of the concepts of you trading rules. Instead of the dollar amount.
Maintain A Trading Journal: Log every trade from entry price to exit price. Write in detail mistakes in the trade if did any, any emotions involved. Trade influenced by the trading rules or emotions etc.
Develop The Probabilistic Mindset: Consider that a single trade is one of the 100th trade. It doesn’t define your strategy, discipline or trading psychology. Real profitability is found when you remain consistent on following the same strategy over the series of the trade.
Last Lines
Having the market bias isn’t a bad thing at all.
Meanwhile emotionally attachment to it, isn’t a promising sign.
When a trader try to defend their opinions by any how, the profits start getting disappeared.
Professional traders understand the trading isn’t about proving the decision right. It’s about responding to what market is saying and adapting the changing conditions.
The strongest trade aren’t ones who are always right. But the strongest traders are the ones who remain flexible in the market and adapt to the changing environment.