DowntownForex

Forex – The Hidden Curse of Bias

By Forex District – This article outlines the hidden issue in a strong trending market and provides trading “re-programming exercises” to assist with overcoming trending bias when market changes direction.

As all good traders know, the trend is your friend, right?  You bet! Catching the waves of momentum in the underlying trend direction following a pull-back especially, is one way to minimize risk and increases the chances of price pushing with force to your advantage. Just ride the wave to profit territory.  Excellent.

But wait.  There’s a little more to this than meets the eye.  Trading the trend has an evil twin. Not only does this evil twin exist, but this twin is definitely NOT your friend.  It is instead, your sworn enemy. This twin has a cursed multiple personality disorder, called Acquired Trend Trading Disorder (ATTD) consisting of 3 separate manifestations, as follows.

ATTD #1.  Neurological Imprinting

At the top of the bias curse list is the neurological imprinting or patterning of trend trading behavior on the brain.

One of the enormous difficulties traders often encounter is un-doing the patterning of a long or short trending bias that was occurring at the time the trader first entered the market and/or after a sustained period of trending bias in one particular direction (such as the long bias we currently have).

This early learning and the pattern of recent experience is often deeply imprinted.  Just like Pavlov’s Dog, the trader is rewarded repeatedly for trading a particular directional bias.  The reward program can be subconsciously set to automatic.

When counter-trend moves occur, for example, when a bull market goes into bear mode, these traders often struggle and incur frequent losses. The bullish bias is so deeply imprinted that the trader is constantly looking only for opportunity to trade their directional bias.  This can blind-side the trader to changed market realities. Trading behavior that is habitual can be extremely difficult to re-program.

Re-program Exercise 1: Subject to market conditions, trade only the opposite direction to your trending bias for “x” period of time.  No other trades allowed. Banning your usual trading bias for a period of time is an important brain work-out, because the trader needs to lay down a new set of rules, a new pattern, in the brain.  This can’t be accomplished if you are changing gear constantly and still clinging to your former bias.  It has to be jettisoned completely in order to put a new brain program in place.

Re-program Exercise 2: (Optional) Subject to market conditions and the time of the trading day, trade only twice a day, once long and once short.  Don’t change horses within minutes, allow space between directional changes to clear your mind of one directional bias before changing to the other, e.g. trade Euro bull (long) on Europe open or prior to Dow open, and then Dollar Bull (short) on US close or US open (subject to futures data).

ATTD #2.  Attachment to Open Positions.

Being already committed to a long/short bias in a position the trader currently has open generates an attachment to wanting to see market continue moving in that direction, regardless of the contrary signals market may be providing.   Emotional attachment to open positions can blind-side the trader to alternative scenarios.

Learning to “trade what you see, not what you expect”, is an important distinction.  Discounting or dismissing valid concerns because the trader is already committed to an open position is a common occurrence.  Recognizing this defensive inner dialogue when it occurs and responding to it with sound judgement is a skill that needs to be developed.

Re-program Exercise 1: Step back, ask yourself this question – “If I wasn’t in this position now, would I get in at this point?” If the answer is no, you have no business being in the trade.  When doubt prevails, lock in profits, reduce your exposure (e.g. take 80% off the table) and/or stay out.  Objectivity suddenly becomes much easier when you aren’t already (or so committed) to an open position.

Re-program Exercise 2: Try working on precision entries, use narrow stops (e.g. Euro 10 pips, Cable 15 pips, Swissy 10 pips, Cad, Aussie, Kiwi and Yen 5-7 pips) and obey them, don’t move or stretch your stops.  Cut losses off at the knees, keep the damage minimal.  Give yourself every chance to look at the market as objectively as possible.  Not holding an open position in drawdown helps to keep directional perspective in better balance.

ATTD #3.   Attachment to Your Country’s Currency.

Some traders (and some analysts) can hold a strong bias towards particular currencies, especially their own.  If the trader’s own sense of self-worth or national identity is wrapped up in seeing their own currency going north, this can be very counter-productive to sound judgement.

The Dollar Bear or Dollar Bull bias in traders (or analysts) is the kiss of death, because in this market, objectivity is everything.

Does it really matter if your country’s currency is going up or down?  Is that a matter of great personal importance to you?  If the answer is yes, then you have a directional bias that is very likely interfering in your trading judgement.  There is only one valid response to this type of attachment – Get Over It.  It will ruin you if you don’t.

The currencies need to be seen purely as a tool for generating money.  The only thing that matters is that they move, preferably with force, and that we as traders thereby make money and benefit.

Re-program Exercise 1: Make a mental or written list of reasons why your country’s currency should go in the opposite direction to it’s current trajectory. Become the devil’s advocate.  Grill yourself about your beliefs and put the counter-argument front and center.  Examine the list critically, objectively, as if you have no personal involvement at all. Become detached from the “fortunes” of your country’s currency.

Re-program Exercise 2: When valid opportunity to trade the contrary direction to your country’s currency present path occurs, trade it.  Reinforce with positive rewards for trading the opposite direction to your emotional attachment.

Summary

Trending bias is both a blessing and a curse. Trading habits, once laid down either in early learning or as a result of recent strong market moves, can be very hard to change. Recognizing the hidden curse in a strong trending market is the first step.  Using simple exercises to train yourself to trade the opposite direction with equivalent comfort and ease can assist to improve your repertoire of trading capabilities and your success rate.

Originally posted by Forex District, by Jade Gate

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