In cryptocurrency trading, or any other type of trading for that matter, being biased is making trading decisions on the assumption, not the evidence, that we are right. It's when someone has a predisposition of the market. In other words, it's when we have a preconceived idea about what's going to happen.
As human beings, we are innately biased toward, approximately, everything. This is due to the simple fact that we are emotional entities. We like to win. Every time that happens, our bodies react to it by releasing hormones to reward us.
This is why we like winning so much. Not only that, this is the main reason why sometimes we believe that we have a chance of winning, even though there's no evidence pointing to that fact. We love tasting that sweet, sweet dopamine.
Therefore, being biased can lead us on a very emotional path. Sometimes we can win and feel very happy and fulfilled. Sometimes we can lose. The latter tends to happen more often than the former.
Consequently, professional traders are very aware of this phenomenon. They know that being emotional has never worked well with trading. On account of this they always try to take emotions out of the game. They know that to achieve consistency in their trading, they need to rely on a well established strategy that takes into consideration all the outcomes.
No cherry picking!
This is the only way you, too, can achieve professionalism in this field. You need to have a consistent record that would inspire the trust of investors while helping you live a peaceful life.
But how can you do that?
It starts by knowing your enemy. In this article I will help you identify 4 of the main biases that could negatively influence your cryptocurrency trading performance. This way you can easily develop mental and psychological dispositions that will help you stay away from them.
Anchoring bias is when our decisions get influenced by a certain reference point. Usually, this reference point, or "anchor", is just the first information we encounter when making our decisions.
For instance, if you see a cryptocurrency that costs $1,000, then, after a while, see its price fall to $200, you'll be more susceptible to see the latter as a discount. And vice versa.
If I asked you what the price of Bitcoin will be in 5 months, would you need to know where the price is today? This is totally legitimate. However, beware! This is a form of anchoring bias. You're starting with the price of Bitcoin today to build a sense of its value in the future based on that anchor. While there's no proof or evidence of any causality between the two values of Bitcoin.
Recency bias is when our assumptions about a cryptocurrency's value are more influenced by recent events, in contrast to factoring in all historical data.
Would it be tempting to you to buy into Bitcoin after Elon Musk has announced that Tesla is accepting it as payment? And would you have sold your Bitcoins because he changed his mind afterward? Well, it's exactly what happened with the majority of traders.
In March 2021, Elon Musk has announced that Tesla would start accepting Bitcoin. Which sent its price on a hike. Mid-May, Elon was tweeting again. However, this time, he was the bringer of bad news. Tesla was no longer accepting Bitcoin.
The impact of these news was noticeable on Bitcoin's price. Showcasing the recency bias in all its glory, as you can see in the chart below.
This is the most notorious bias of them all. To put it simply, it's when you do your research and interpret facts to confirm your own pre-existing believes.
Confirmation bias can directly affect your trades, either by pushing you to overinvest in a certain cryptocurrency, or making you convince yourself to not enter a potentially wining trade. It distorts your view of the cryptocurrency market as you start understanding it as you want it to be and not as it really is.
When talking about hindsight bias, I can't help myself but think of Captain Hindsight from South Park. With his friends "Should've", "Could've" and "Would've". It's spot on what hindsight bias means.
As the name suggests, hindsight bias is the phenomenon where people believe that they could have predicted the outcome of a trade based on the past performance of the cryptocurrency's price.
Once we know how the value of a crypto-asset has unveiled, it becomes easier to explain it. Even though we would've never been able to be absolutely sure about such explanation at that time in the past.
But you know what they say, "hindsight 20/20!"
How can I avoid these biases?
You can complement your view of the market and your assumptions with a good strategy. Because there's just no substitute for rigorous thinking.
Instead of looking at where the price of a cryptocurrency is today, why not build up a real view on the cryptocurrency's value through fundamental and technical analysis.
While putting your trading strategy together or when you're conducting research, avoid having any predispositions. Be open and communicative with yourself. Try to identify any confirmation biases you might have so that you can avoid trading cryptocurrencies on impulses.
At the end of the day, you're the only one responsible for your own trading decisions. Trade wisely!