Common Psychological Pitfalls in Trading

Reading through a short article on the Turtle Traders website about trend following there is a short list of common pitfalls in trading. Out of those I have recognized a few that I believe I have an issue with…

Anchoring and adjusting
In considering a decision, we often give disproportionate weight to the first information we receive, hence anchoring our subsequent thoughts. You can mitigate this risk by seeking information from a variety of sources and viewing various perspectives.

Improper framing
The decisions of investors are affected by how a problem, or set of circumstances, is presented. Even the same problem framed in different, and objectively equal, ways can cause people to make different choices. Framing, too, plays a central role in assessing probabilities.

Irrational escalation of a commitment
Investors tend to make choices that justify past decisions, even when circumstances change. To avoid this trap, investors must only consider future costs and benefits.

Confirmation trap
Investors tend to seek out information that supports their existing point of view while avoiding information that contradicts their opinion.

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