Cognitive biases are mental shortcuts that can influence how we interpret information and make decisions. In trading, trying to eliminate them completely is less practical than designing a process that reduces their impact and reveals when a decision drifts away from the plan.
Common trading biases
- Confirmation bias: mainly seeking information that supports your idea.
- Recency bias: giving too much weight to the latest trades.
- Anchoring: becoming fixed on an initial price, target or reference.
- Loss aversion: managing a position differently to avoid closing negative.
- Outcome bias: judging the decision only by whether it won or lost.
- Overconfidence: relaxing rules after good results.
How a journal can help
A journal does not automatically identify a psychological bias, but it can record the behaviour left behind: risk changes, late entries, rule violations, stop changes or trade selection.
Use pre-defined rules
The more critical decisions are defined before the trade, the less room there is to reinterpret rules once the market is moving.
Review sequences
Biases often appear in context. Compare behaviour after losses, after wins, during high-volatility days or when an initial idea becomes invalid.
Create testable hypotheses
Instead of concluding “I have recency bias,” test something more specific: “after two losses I execute fewer valid setups.” That statement can be checked against data.