Whatever you trade, stocks or cryptos, Bitcoin (BTC), Ethereum (ETH) or DogeCoin (DOGE), you will likely lose money if you are not aware of the following 7 cognitive bias in trading.
What are the 7 typical trading cognitive bias?
1. Anchoring
This bias occurs when an investor has a tendency to rely too heavily on the first piece of information they receive (the “anchor”) when making a decision.
Imagine, for instance, you want to buy 1 Solana (SOL). You find out that the All-Time High (ATH) of SOL is $260. You check the current price and see it is $10. You buy 100 SOL, since it is 96% lower than the ATH. However, you later find out that the price could dive further...
2. Loss Aversion
This bias occurs when an investor has a greater fear of losing money than the potential to gain.
It means not losing $1,000 is more important to you than gaining $1,000. And this can seriously affect your ability to trade, for instance by urging you to set a stop-loss which is too tight.
3. Overconfidence
This bias occurs when an investor overestimates their own knowledge and ability to make accurate predictions about the market.
For instance, you buy Ripple (XRP) because according to indicators like RSI, MACD and Fibonacci, you think its price will pump soon.
4. Herding
This bias occurs when an investor follows the actions of other investors, instead of making independent decisions.
That's the typical FOMO (Fear Of Missing Out) effect which can happen with popular cryptos like DogeCoin (DOGE) after Elon's tweets...
5. Confirmation Bias
This bias occurs when an investor only seeks out information that confirms their existing beliefs.
That's typically what happens with Bitcoin or other coins maximalists...
6. Gambler’s Fallacy
This bias occurs when an investor assumes that a previous event will influence a future event, even though there is no logical connection between the two.
For instance, you do not sell a crypto which has fallen for several consecutive days, because you see the rise of this crypto as a matter of time, since it has already dumped a lot...
7. Availability Heuristic
This bias occurs when an investor puts too much emphasis on the most recent or easily accessible information.
For instance, after hearing that some friends of yours lost their life savings on some pump-and-dump shitcoin, your conviction that Bitcoin is the same scam steadily grows...
Disclaimer: this article does not contain any financial advice. The information is provided for general informational and educational purposes only.
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