L1.3 — Cognitive Biases That Affect Trading Decisions

Recency bias causes traders to weight recent trades far more heavily than the full statistical sample. After three losses, the strategy feels broken. After three wins, it feels unbeatable. Neither conclusion is statistically justified from three data points — but the emotional weight of recent experience overwhelms the rational interpretation of small samples.

Confirmation bias causes traders to search for evidence that supports the trade they already want to take and ignore evidence that argues against it. The chart is read selectively. Timeframes that agree with the bias are examined; timeframes that disagree are dismissed or not consulted. Loss aversion causes traders to hold losing trades far too long — the psychological pain of realising a loss is approximately twice the pleasure of an equivalent gain, creating an asymmetric reluctance to close.

The countermeasure for all three: write down your analysis before looking at the chart in the direction of your intended trade. Force yourself to articulate the case against the trade. Use a checklist that requires you to check the opposing timeframe. These are friction tools — they slow down the emotional brain long enough for the rational brain to contribute.