Trade Aptitude

Trading success is more psychological than mathematical. When I first realized this I was disappointed. I like math and wanted to find my success in formulas, indicators, and statistics. These are all valid tools for finding edge, but that edge won’t translate into positive performance until you get your head right. 

I’m intrigued by the number of biases we might have that hinder our success. Here’s a look at some less obvious biases that interrelate. 

Narrative Fallacy: This occurs when you create or believe in simplistic stories to explain market behaviors, even if the data doesn’t support those stories.

For example, you may believe  a market “story”—such as “Tech stocks always lead the market”—and ignore data that contradicts it. This can lead to biased decision-making, missed opportunities, and unnecessary losses. 

This is an easy one to catch yourself with. Anecdotal stories are obvious!

Here’s the fix: Focus on data. Prioritize quantitative analysis over storytelling. Play Devil’s Advocate. Regularly question your assumptions. Ask, “What if this narrative is wrong?” or “What would the data look like if this story weren’t true?”

Then there is a close cousin called Survivorship Bias: This involves focusing on successful outcomes while ignoring those that failed, leading to bad perceptions and decision-making. By doing so, you could overestimate the profitability of certain sectors, strategies, and rulesets. 

Here’s an example. You notice that your best two trades last month were stocks in the tech sector. Without investigating how a few dozen other stocks in the sector performed, you fall into a Narrative Fallacy… “Tech stocks are hot!” You re-balance your portfolio overweighted in tech. 

Now you’re susceptible to Position Sizing Illusion. This occurs when you misjudge the impact of position sizing on your overall portfolio risk and performance. Being overweighted in tech you have a greater chance of drawdown if the sector fails to perform as expected. 

Can you see how these Biases might become a chain reaction? Take the time to learn about other biases and be aware when you have them. Consistent improvement comes from refining both your strategy and your mindset. 

To your trading success,

Mike Siewruk

PS: Feel free to forward this blog to your trading buddies. Share in the wealth!