In crypto trading, decision-making is crucial. The more reasonable you are, the more likely you make profitable trades. That is why we must constantly assess our mental state. Are we still looking at things from the proper perspective? Is our sound logic still guiding us? Even if we do not, we feel convinced that we sometimes do. And this is where bias enters the picture.
Familiarising yourself with the many types of decision-making bias is one component in determining if you are already biased. Doing so will assist you in being aware of it, allowing you to avoid it. Let us look at two of the most common biases that most crypto traders face.
Outcome bias is the first. Outcome bias occurs when an individual is basing his decision on previous event outcomes rather than how those events unfolded; that is according to Investopedia. Outcome bias avoids examining the causes that led to a situation in the past, instead emphasising the outcome and downplaying the events that preceded it. Outcome bias, unlike hindsight bias, does not involve the distorting of previous events.
With this bias, the decision is based only on the outcome of something. A trader is not curious how it happened and how the successful person they look up to made it happen. For example, your friend invests in an unknown coin, but your friend earns 200% profit. And, as a result of your excitement at the outcome and profit, you decided to invest as well. You took a risk without understanding what kind of coin it was, where it came from, or what it was for. The outcome or profit is what drives your decision.
Outcome bias, from the term itself, focuses on the actual outcome. For example, an investor decides to invest in crypto after learning a colleague made an enormous return on an investment in the said industry when interest rates were at a different level. Rather than considering other elements that may have contributed to your colleague’s success, such as the current market state or technical indicators, the investor is just concerned with the money your colleague has made. You can dive deeper into this topic through Wikipedia.
Individuals who fall victim to this bias rely on the testimony of friends, colleagues, and acquaintances as proof of success. They defend their financial decisions by claiming that their friends have advised them that they are correct. This drive to keep investing is risky because it could result in more financial loss.
As a result of this behaviour, many people get duped. When someone presents proof of money from prior investors, they cannot control their emotions and make decisions based on the outcomes of previous transactions. It roots in one of the innate traits of man, getting jealous of others’ success.
Now, let us talk about recency bias. Recency bias is one of the most dangerous aspects of the trading mindset. This bias is the habit of exaggerating the significance of recent occurrences. As a result, a trader suffers a loss. Yahoo explains that recency bias is a phenomenon in which people remember the recent past easier than the distant past. As a result, individuals are more prone to emphasise recent occurrences over older ones.
For instance, the trade you made yesterday had a more significant impact on you than the ones you made last week. Let’s imagine you have lost three trades in a row. But before this, you had won for nearly two weeks in a row. Your recent setbacks have impacted you more than your previous successes. This predicament will make you question your approach and structure. Even if you know the winning trade is already working, you will be reluctant to trade with that current strategy.
By the same token, traders tend to keep up what they are doing if the recent events favour them. But what if the situation in the present is different from the recent past? Yes, that is right. They might also lose. That is true if they do not research the current market environment and instead base their decisions on the emotion they experienced after winning recently.
In our hypothetical circumstance, let’s invert the situation. Let’s pretend you’ve won three days in a row. As a result, you will have a more bullish attitude on the market. You’ll get the sensation of being a hero. You will believe that you are the best trader on the planet. Then you’ll forget about your losses from the previous weeks. As a result, traders are more likely to feel euphoric, leading to poor decision-making. They make a trade that isn’t compatible with their system.
Perhaps the perfect analogy for this is the tendency of people to cross a pedestrian lane without precautions. Though aware that the route is dangerous and that someone has already died while crossing it, they continue to do so without taking any precautions. They do that because they think it is safe. They did not experience any accident in the recent times they crossed that road. So, what is the big deal? This behaviour is risky. We tend not to look at the opposite road when crossing pedestrians just because we feel safe in doing so.
How Smart Traders Deal with It?
Since our nemesis when we are biased is our mind, we have to look for external help. Despite the effort we put into studying it, it might be challenging to deal with it on our own at times. Even if we are aware of its characteristics and when it occurs, we still get caught unaware. The best action is to consult our colleagues or co-traders, friends, and family. Others who need professional help go to trading platforms to connect with experienced brokers. A perfect example of this is Bitcoin Revolution App. They use such trading platforms to connect with the finest brokers in the industry.
To Sum It Up
We may be wrong during the times we think we are so right. Therefore, we have to pause and think for a while. Rigorous research about the different types of biases will also be beneficial. Remember that you have to take your own risk when trading crypto because the crypto market is highly volatile. And your knowledge on how to make a sound decision may help lower the risk.
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