How the mind distorts what it sees

Loss aversion changed when you sell. The biases in this chapter are sneakier, because they change what you see in the first place. Your mind is not a camera recording the market faithfully. It is a storyteller, and it edits the footage to fit the story you already believe. Four of its favourite edits cost traders real money, and the only defence is to know their names so you can catch yourself in the act.

Seeing only what agrees with you

The first is confirmation bias: once you hold a view, you notice every piece of evidence that supports it and quietly ignore everything that contradicts it. You buy Reliance convinced it will rise, and from that moment your attention narrows. The bullish article feels insightful; the bearish one feels like noise from someone who does not get it. You seek out the voices that agree with you and dismiss the ones that do not, and you mistake a one-sided search for research.

The error it causes is holding a broken trade because you have filtered out every sign that it is broken. The counter-habit is deliberate and uncomfortable: before entering, write down what would prove you wrong, the specific price or event that would mean the trade has failed. Your stop is one such line. Then, while in the trade, actively look for the disconfirming evidence you are wired to skip past.

Overweighting what just happened

The second is recency bias: giving far more weight to what happened recently than to the fuller picture. Three winning trades in a row and you feel unstoppable, so you size up just as the streak is about to end. A sharp market fall last week and you are certain the next one is coming, so you sit out the recovery. Recency makes the last few candles feel like the whole truth.

The error is treating a short, recent run as if it predicts the future, in your sizing, your confidence, and your market view. The counter-habit is to widen the frame: look at more history than the last few days, and remember from Part 1 that short runs are mostly noise. A losing streak does not mean you are broken, and a winning streak does not mean you are gifted. Both are the weather, not the climate.

Fixating on a number

The third is anchoring: latching onto a specific number and letting it distort every judgement that follows, even when the number is irrelevant. The most common anchor in trading is your own purchase price. You bought at 1,400, so 1,400 becomes a magic line. You refuse to sell below it because that would mean a loss against your anchor, and you feel the stock owes you a return to it. But the market has never heard of your entry price. It does not know or care what you paid. The stock is worth what it is worth now, and whether to hold it should depend on its prospects from here, not on your personal anchor.

The error is holding a loser because selling below your buy price feels like defeat, which is anchoring joining forces with loss aversion. The counter-habit is to ask a clean question of any open position: knowing what I know now, and ignoring what I paid, would I buy this today? If the answer is no, your anchor is the only reason you are still holding.

Mistaking luck for skill

The fourth is overconfidence: overrating your own judgement and underrating what chance is doing. It is the most dangerous of the four, because it hides behind success. A few good trades, especially early, feel like proof of skill when they may be mostly luck, and that false confidence leads to bigger sizes and looser rules right before the market corrects the misunderstanding for you.

Recall the honest fact from the first chapter: the large majority of individual traders lose. Almost none of them expected to be in that majority. Overconfidence is a large part of why. Everyone believes they are the exception, the naturally gifted one, and the belief itself causes the over-sizing that puts them in the losing column. The counter-habit is humility made mechanical: keep your size fixed by rule regardless of how confident you feel, judge yourself over many trades rather than a lucky few, and let the trading journal in the next part show you the difference between what you did well and what merely worked out.

What to carry forward

Your mind edits the market to fit the story you already hold. Confirmation bias makes you see only agreeing evidence; recency bias makes the last few trades feel like the whole truth; anchoring chains you to your purchase price; and overconfidence dresses luck up as skill, which is why almost everyone expects to beat odds that almost no one beats. The defences are not cleverness but mechanical habits and an honest record.

There is one more emotional trap in this part, and it pulls you into trades rather than distorting the ones you hold: the urge to be in the market, always doing something, for fear of missing out. The next chapter is about that urge and the overtrading it causes.