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5 Cognitive Biases Destroying Your Trading Performance

· 11 min read
Karthik
Karthik
Founder, TradeLyser

Your brain is lying to you.

Not intentionally. It's just wired for survival in the savannah—not for trading modern markets.

The same mental shortcuts that helped your ancestors survive predators now cause you to:

  • Hold losers too long
  • Cut winners too early
  • Overtrade
  • Revenge trade
  • Blow up accounts

Let's fix that.

What Are Cognitive Biases?​

Cognitive biases are systematic errors in thinking that affect decisions and judgments.

They're:

  • Universal (everyone has them)
  • Unconscious (you don't realize it's happening)
  • Automatic (hard to override)
  • Predictable (follow patterns)

In trading, they're deadly.

Bias #1: Confirmation Bias​

What It Is​

Confirmation bias: Seeking information that confirms your existing beliefs while ignoring contradictory evidence.

How It Ruins Trading​

Scenario:

You're bullish on RELIANCE.

What you notice:

  • ✓ Positive news about the company
  • ✓ Analyst upgrades
  • ✓ Charts that show upside potential
  • ✓ Twitter posts saying "RELIANCE to moon!"

What you ignore:

  • ✗ Negative earnings indicators
  • ✗ Analyst downgrades
  • ✗ Charts showing resistance
  • ✗ Sector weakness

Result: You enter a biased position, ignoring real risks.

Real Example​

Trader A's story:

Bought NIFTY futures at 24,500:

  • Stop loss: 24,400
  • Price drops to 24,380
  • "It's just shaking out weak hands" (finds bullish explanations)
  • Holds position
  • Price drops to 24,200
  • Finally exits at -₹15,000 loss
  • Stop loss would have been -₹5,000

Confirmation bias cost: ₹10,000

How It Manifests​

1. Cherry-Picking Data

  • "See! This indicator says buy" (ignoring 3 that say sell)

2. Seeking Supporting Opinions

  • Asking multiple people until someone agrees with you

3. Overweighting Recent Wins

  • "My strategy worked last week" (ignoring month of losses)

4. Ignoring Exit Signals

  • "That's just noise" (when it contradicts your view)

How to Fix It​

Strategy #1: Devil's Advocate

For every trade, write:

Bull Case:

  • 3 reasons this will work

Bear Case:

  • 3 reasons this will fail

If you can't write bear case: You're too biased to trade it.

Strategy #2: Checklist (Pre-Trade)

Before entering:
□ What evidence supports this trade?
□ What evidence contradicts this trade?
□ Am I ignoring any red flags?
□ Would I take this if I had opposite view?
□ What could prove me wrong?

Strategy #3: Opposite Analysis

Exercise: Try to convince yourself of the OPPOSITE view.

If you can't: You're in confirmation bias

Strategy #4: Use Stop Losses

Stop loss = Admission criteria

"I'm wrong if price goes here"

No rationalizing. No holding. Just exit.

TradeLyser Feature: Auto-alerts when ignoring stop loss signals

Bias #2: Recency Bias​

What It Is​

Recency bias: Giving more importance to recent events over historical data.

How It Ruins Trading​

Scenario 1:

Last 3 trades: Winners (+₹15,000 total)

Your brain: "I'm invincible!"

Action: Increase position size, take riskier trades

Next trade: Massive loss (-₹20,000)

Scenario 2:

Last 3 trades: Losers (-₹9,000 total)

Your brain: "I can't win!"

Action: Skip the next A+ setup

Result: Miss a winning opportunity

Real Example​

Bull market 2020-2021:

Everything went up. Traders thought:

  • "Stocks only go up"
  • "Buy every dip"
  • "Can't lose"

March 2020 crash:

  • Recency bias: Forgot markets can crash
  • Many traders wiped out
  • "But it always recovered before!"

How It Manifests​

1. Extrapolating Recent Results

  • 3 wins = "I'm a genius"
  • 3 losses = "I'm terrible"

2. Abandoning Strategy After Short Downturn

  • Strategy worked for 6 months
  • 2 bad weeks = "Strategy broken, must change"

3. Overconfidence After Win Streak

  • 5 wins in a row
  • "I can't lose! Let me 10x position size"

4. Paralysis After Loss Streak

  • 5 losses in a row
  • "I can't win! I'll skip all setups"

How to Fix It​

Strategy #1: Long-Term Tracking

Always review:

  • Last 50 trades (not last 3)
  • Last 3 months (not last 3 days)
  • Complete strategy stats (not recent results)

TradeLyser Dashboard:

  • Shows rolling 100-trade statistics
  • Recent results vs long-term edge
  • Prevents recency-driven decisions

Strategy #2: Expected Variance

Calculate your expected streaks:

With 60% win rate:

  • 5-win streak: Happens ~every 36 trades
  • 5-loss streak: Happens ~every 98 trades

Write these down. When they happen:

"This is normal variance, not a sign"

Strategy #3: Decision Journal

Before changing strategy, ask:

  • How many trades in this sample?
  • What's my long-term data say?
  • Is this statistical significance or noise?
  • Am I reacting to recent results?

Rule: Need 30+ trades minimum to judge strategy change

Strategy #4: Automate Position Sizing

Don't manually adjust based on recent results

Set rule:

  • Always 1% risk per trade
  • Doesn't change after wins
  • Doesn't change after losses

Bias #3: Loss Aversion​

What It Is​

Loss aversion: Losses hurt 2-2.5x more than equivalent gains feel good.

Result: Irrational behavior to avoid losses.

How It Ruins Trading​

Scenario:

You're in a losing trade (-₹5,000).

Rational action: Cut loss (follow stop)

Loss aversion: "If I hold, it's not a real loss yet. It might come back."

Result:

  • Small loss becomes big loss
  • -₹5,000 becomes -₹15,000

Real Example​

Trader B:

Winning trades: Exits quickly at +₹2,000 (fear of losing profit) Losing trades: Holds hoping for recovery (-₹6,000 average)

Result:

  • Win rate: 65%
  • Still losing money overall
  • Winners: +₹2,000 avg
  • Losers: -₹6,000 avg

Math:

  • 65 wins × ₹2,000 = ₹1,30,000
  • 35 losses × ₹6,000 = -₹2,10,000
  • Net: -₹80,000

Loss aversion inverted risk:reward.

How It Manifests​

1. Holding Losers

  • "It'll come back" (hope)
  • "I'll exit at breakeven" (anchor)
  • "Just a pullback" (denial)

2. Cutting Winners

  • "Better take profit before it reverses"
  • "A profit is a profit"
  • Booking +1R, missing +5R

3. Avoiding Necessary Losses

  • Not setting stop losses
  • Moving stops away
  • "Stops get hunted"

4. Bigger Positions on Losers

  • "Averaging down"
  • "Dollar-cost averaging" (in trading context)
  • Turning 1% loss into 5% loss

How to Fix It​

Strategy #1: Pre-Define Exits

Before entering:

  • Stop loss: [Price]
  • Target 1: [Price]
  • Target 2: [Price]

Set stops immediately. Never move against you.

Strategy #2: Think in R-Multiples

Don't think: "I'm down ₹5,000"

Think: "I'm at -1R (risk)"

Benefit: Normalizes losses, reduces emotional weight

Strategy #3: Exit Rules (Non-Negotiable)

Example:

  • Always cut at stop loss
  • Always let winners run to target
  • Never exit winner before target unless invalidation

No thinking. No emotion. Just follow.

Strategy #4: Daily/Weekly Loss Limits

Rule: After X% loss, stop for day/week

Benefit:

  • Prevents loss aversion spiral
  • Forces break before irrational holding

TradeLyser: Automated circuit breakers

Bias #4: Anchoring Bias​

What It Is​

Anchoring bias: Relying too heavily on the first piece of information (the "anchor").

How It Ruins Trading​

Scenario:

You bought RELIANCE at ₹2,500.

Price is now ₹2,350.

Your thinking:

  • "I'll exit when it gets back to ₹2,500" (anchored to entry price)
  • "I'll only sell at breakeven"

Problem: The market doesn't care what price you bought at.

Real Example​

Trader C:

Bought INFY at ₹1,500.

Price action:

  • Dropped to ₹1,450 (should have stopped out at ₹1,480)
  • "I'll wait until ₹1,500 to sell" (anchored)
  • Drops to ₹1,400
  • Still waiting for ₹1,500
  • Eventually exits at ₹1,350

Anchor (₹1,500) prevented rational exit.

Cost: Additional ₹13,000 loss

How It Manifests​

1. Breakeven Anchoring

  • "I'll exit at my entry price"
  • Ignores technical invalidation

2. Previous High/Low Anchoring

  • "Stock was at ₹3,000 last month, so ₹2,500 is cheap!"
  • Ignores fundamental changes

3. Target Price Anchoring

  • Analyst target: ₹2,800
  • Technical says exit at ₹2,600
  • Holds for ₹2,800 target
  • Loses the ₹2,600 profit

4. Round Number Anchoring

  • "I'll sell at ₹25,000" (round number)
  • Technical resistance is ₹24,850
  • Misses exit, reverses before ₹25,000

How to Fix It​

Strategy #1: Ignore Entry Price

Entry price is irrelevant after you're in the trade.

What matters:

  • Current technical situation
  • Risk:reward from HERE
  • Strategy invalidation points

Ask: "If I didn't have a position, would I enter at this price?"

Strategy #2: Price-Action Based Exits

Don't use:

  • "Exit at breakeven"
  • "Exit at [arbitrary price]"

Do use:

  • "Exit if stops below support"
  • "Exit if breaks below 20 EMA"
  • "Exit if trend invalidation"

Strategy #3: Blind Trading

Exercise: Cover entry price after entering

Trade based on:

  • Technical levels
  • Strategy rules
  • Current situation

Not based on:

  • P&L
  • Entry price
  • "How much I'm up/down"

Strategy #4: R-Multiple Thinking

Instead of: "I'm down ₹5,000 from my entry"

Think: "I'm at -1R, my stop is -1R, I should exit"

Removes anchor to entry price.

Bias #5: Gambler's Fallacy​

What It Is​

Gambler's fallacy: Believing that past events affect future probabilities in independent events.

Examples:

  • "I've lost 5 times, I'm DUE for a win"
  • "I've won 5 times, I'm DUE for a loss"

How It Ruins Trading​

Scenario 1: The "Due" Trade

5 losses in a row.

Your brain: "I'm due for a win! The next one HAS to work!"

Reality: Next trade still has same probability (e.g., 60%)

Action: Increase position size ("I'm due!")

Result: If it loses (40% chance), bigger loss

Scenario 2: The "Curse" Trade

5 wins in a row.

Your brain: "I'm due for a loss, I should skip the next setup"

Reality: Next trade still has 60% win probability

Action: Skip A+ setup

Result: Miss profitable opportunity

Real Example​

Trader D:

After 4 consecutive losses:

  • "The 5th trade HAS to win" (gambler's fallacy)
  • Doubles position size
  • 5th trade also loses
  • Now down 2x normal

Math reality:

  • Each trade is independent
  • Win probability: 60% (always)
  • Past results don't change future probabilities

How It Manifests​

1. "Due for Win" Thinking

  • After losses, feeling "owed" a win
  • Increasing size to "recover faster"

2. "Due for Loss" Thinking

  • After wins, feeling "can't keep winning"
  • Skipping valid setups

3. Streak Superstitions

  • "I always lose the 3rd trade"
  • "Mondays are bad for me"
  • Self-fulfilling prophecies

4. Revenge Trading

  • "I MUST win this back"
  • Forcing trades after losses

How to Fix It​

Strategy #1: Understand Probability

Key concept: Each trade is independent

With 60% win rate:

  • Trade 1: 60% chance to win
  • Trade 2 (after loss): Still 60% chance
  • Trade 3 (after 2 losses): Still 60% chance
  • Trade 100 (after 10 losses): Still 60% chance

Past results don't change future probabilities.

Strategy #2: Fixed Position Sizing

Rule: Always risk X% per trade

Never:

  • Increase after losses ("due to win")
  • Decrease after wins ("due to lose")

Position size should be:

  • Based on stop loss distance
  • Based on account size
  • NOT based on recent results

Strategy #3: Process Over Outcomes

Judge each trade on:

  • Did I follow my rules? (Yes/No)
  • Was it my A+ setup? (Yes/No)
  • Did I execute properly? (Yes/No)

NOT on:

  • Did it win?
  • What's my recent streak?
  • How do I feel about probability?

Strategy #4: Expected Variance Awareness

With 60% win rate, expect:

  • 2-3 loss streaks: Common
  • 4-5 loss streaks: Happen regularly
  • 6+ loss streaks: Rare but possible

Calculate YOUR expected streaks based on your win rate

When they happen: "This is normal, not a sign"

How Biases Interact (The Deadly Combo)​

Real scenario:

  1. Confirmation bias: See bullish signals only
  2. Enter trade: Long RELIANCE @ ₹2,500
  3. Anchoring bias: "I'll exit at breakeven if wrong"
  4. Loss aversion: Trade goes to -₹5,000, "It'll come back"
  5. Recency bias: Recent trades worked out, so this will too
  6. Gambler's fallacy: "I'm due for a win!"
  7. Result: Small loss becomes ₹15,000 loss

Multiple biases compound the damage.

The Anti-Bias System​

Component #1: Awareness​

You can't fix what you don't see

Daily reflection: "Which bias affected my trading today?"

Component #2: Checklists​

Pre-trade:

  • Am I ignoring contrary evidence? (Confirmation)
  • Am I reacting to recent results? (Recency)
  • Am I afraid to take this loss? (Loss aversion)
  • Am I anchored to entry price? (Anchoring)
  • Do I feel "due" for outcome? (Gambler's fallacy)

Component #3: Rules & Automation​

Remove human decision:

  • Auto-stops (no moving allowed)
  • Position size calculator (no adjusting)
  • Max trades per day (no overtrading)
  • Circuit breakers (forced stops)

Component #4: Journaling​

After each trade:

  • What bias tempted me?
  • Did I overcome it?
  • If not, what was the cost?

Monthly review:

  • Which bias is my biggest problem?
  • What system can I build to prevent it?

Component #5: Accountability​

Trading buddy/mentor:

  • Reviews your trades
  • Points out biases you're blind to
  • Holds you accountable

The Bottom Line​

Your brain is not designed for trading.

It's designed to:

  • Keep you alive on the savannah
  • Make quick, approximate decisions
  • Conserve mental energy

Trading requires:

  • Cutting losers (painful)
  • Letting winners run (scary)
  • Thinking probabilistically (unnatural)
  • Being patient (boring)

The solution: Systems over willpower

Build:

  • Checklists
  • Automation
  • Rules
  • Accountability

Because awareness alone isn't enough.

Take Action Now​

Today:

  1. Identify your #1 bias (which one resonates most?)
  2. Write down one system to counter it
  3. Implement that system tomorrow

This Week:

  1. Track which biases tempt you
  2. Journal when you overcome them
  3. Journal when you don't (and the cost)

This Month:

  1. Build anti-bias checklists
  2. Automate bias prevention in TradeLyser
  3. Review: Is bias-cost decreasing?

👉 Track Bias Patterns in TradeLyser
👉 Download: Anti-Bias Checklist
👉 Next: Connect Your Broker to TradeLyser in 5 Minutes

Which cognitive bias affects you most? Share your experience below.