This note includes the following topics:

Fear of Missing Out (FOMO)

• You missed out on a big trend, but since it keeps rising you feel it would be stupid not to join in
• By the time you place your order, the train has already left the station. The trend then reverts and you lose money
• Traders usually ignore their strategy due to FOMO and lose their EDGE

The Confirmation Bias

• The tendency to search for information that confirms one’s beliefs while rejecting facts/information that casts doubt on it
• Confirmation bias cycle:
  • A trader gets a hot stock tip (from social media, chatroom, newsletter, guru, etc.)
  • Looks for positive remarks in Yahoo Finance, Seeking Alpha to justify buying that stock
  • The trader may get lucky and generate a short term profit
  • Reinforces BAD habit
  • The trader then gets super confident and removes his stop loss
  • Reinforces another costly BAD habit
  • Later the stock value goes down. Ignores any stop-loss rules
  • Calls his friend or finds his stock guru for confirmation once again
  • CNBC: Company CEO is very bullish
  • Later the stock value rises back slowly
  • Confirms his bias which gives confidence
  • Reinforces BAD habit
• Overcoming confirmation bias:
  • Have Entry/Exit checklists
  • Quit seeking other people’s opinion
  • Use hard stop loss

The Recency Bias

• The tendency to think that trends and patterns which occurred recently will continue in the future
• Each trade should be treated independently
  • Recent losing trades do NOT mean the next one will be
  • Recent winning trades do NOT mean the next one will be
• Overcoming recency bias:
  • Regardless of what happened recently, always respect the Strategy

Focus

• Focus on executing your trading Strategy perfectly
• Do NOT focus on money which leads to
  • Entering trade without a buy signal for making a quick buck (FOMO)
  • Staying too long in a trade to make a certain amount of money
  • Exiting a trade too early in the fear of losing a paper profit
  • Not respecting your stop loss to regain your paper loss
  • Revenge trading after losing a specific amount of money

Noise

• Anything outside of your trading strategy
• Sources of noise:
  • Twitter, Stocktwits
  • Friend’s and Guru’s trading idea
  • Newsletter and Economic reports
  • CNBC, Economist Opinion, S&P500 Charts
• Overcoming noise:
  • Be self-reliant with a positive expectancy trading Strategy
  • Tune out the noise and social media

Confidence

• Having confidence in your Strategy will allow traders to AVOID:
  • System hopping without fully utilizing a strategy
  • Not respecting your stop loss
  • Not taking an entry which might be a 10R trade.
  • Overtrading (after seeing fake PnL of many influencers)
• Losing streak will trigger loss of confidence
  • Every trading strategy will have an inevitable losing streak
• Overcoming low confidence:
  • Know your strategy inside out
  • Think in probabilities, not in certainties
  • Customizing a strategy to be your OWN
  • Trade journal to motivate you in low days
  • PRACTICE! PRACTICE!! PRACTICE!!!

Money

• Money is just a tool as a knife
  • Can be used to build schools, cure diseases, fund charities, etc
• Not all rich people are bad. In fact, they are hard-working people. Media highlight the extremely bad ones

Money Scarcity Mindset

• Thinking it is difficult to make money and easy to lose it
• Consequences:
  • Makes a trader freeze when a trade goes wrong losing a lot of money
  • Taking a profit too early which may not offset all the small loses(bound to happen in any trading strategy)
  • Being more risk-averse when your account grows bigger
• Books:
  • Acres of Diamonds by Russell Herman Conwell
  • The secret of the millionaire mind by T. Harv Eker