A Trader’s Worst Enemy

by Darrin Donnelly on March 10, 2011

What’s the fastest and most common way to ruin a trading account?

Some might say it’s “lack of capital” or “taking too much risk.”  Very good answers tied to the importance of portfolio and risk management.

Some might say it’s being “too greedy” or “too fearful.”  Two more very good answers tied to the human emotions that power the markets.

But the real answer comes down to one single word: BIAS.

Now don’t misunderstand “bias” to mean the same as “preference.”  Obviously, if I’m long in a position, I prefer that it goes higher and I make more money.

Rather, “bias” is defined by Merriam-Webster as “a personal and sometimes unreasoned judgment.”  The Merriam-Webster Dictionary offers the following synonym: “prejudice.”

Preferring to see the market, or a particular stock, go higher and having a biased belief that it will go higher are two entirely different things.

Being biased about the stock market sets a trader up for disaster.  It’s caused by doing lots of research, forming an opinion, and then making a prediction.  These predictions are then shared with others –sometimes a national TV audience – which only makes the biased opinion stronger. 

The trader now has more at stake than his money alone.  The trader now has a reputation to keep.  He’d rather be “right” than rich.

Pride and ego fuel a trader’s bias.

I like to tell beginning traders that you know you’ve crossed an important milestone when you are no longer biased about whether the market goes up or down. 

When you reach this realization, it means you finally recognize that you can make money going long in an uptrend or short in a downtrend.  It doesn’t matter to you which way the market goes, you just want to be on the correct side and making money with the trend.

Eliminating all biases allows you to become more focused on READING the market instead of HOPING for the market to do what you want – or predicted – it to do.

Be brutally honest with yourself when evaluating the market or an individual stock.  Ask yourself if you’re being biased or wishful in any way.  Remove all aspects of prejudice and prediction and simply follow what the market is ACTUALY doing.

* You can follow the market accurately in the pages of Darvas Trader PRO, where you receive updated status reports on the market’s current trend, along with access to the full portfolio of Darvas stocks – with EXACT buy points and sell points.  Check out the latest issue of Darvas Trader PRO by clicking here.

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