In his great book “Trade Mindfully: Achieve Your Optimum Trading Performance with Mindfulness and Cutting Edge Psychology” on the very beginning Dr Gary Dayton makes list of trading difficulties that all traders experienced in some point of their trading carrier.
Dr. Dayton is a psychologist and holds a doctorate in clinical psychology and a certificate in human performance/sport psychology from Rutgers University. He is President of Peak Psychology, Inc., a consulting firm that specializes in developing “peak” performance in traders.
Thoughts are a natural part of us, accepting them seems natural, too, but in trading, this can be dangerous. Part of the danger comes from natural limitations in our cognitive capabilities. There are certain mental boundaries that often constrain the way we think, distort the way we process information, and impact the way we make decisions that cause predictable errors in trading. These are our mental blind spots commonly referred to as cognitive biases and heuristics.
The most important mental blind spots for traders include:
- The representativeness heuristic
- The recency effect
- Loss aversion
- Confirmation bias
- Base rate neglect
- The affect heuristic
- Hindsight bias
- The endowment effect
- Optimism bias
Understanding these mental blind spots and becoming aware of them in one’s own trading are crucial for the trader as they can directly affect trading performance and results.