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What is negativity bias, and how can I avoid it in my trading?

What is negativity bias, and how can I avoid it in my trading?
Asked by
Anna Winter time-icon1 week ago
1 Answer Answer Question

Justin Freeman
Answered time-icon1 week ago

Negativity bias refers to our natural tendency as human beings to focus more on the negative aspects of life than the positive ones. Psychologists and other medical practitioners who study the human brain have discovered that it tends to gravitate towards negative events while ignoring positive ones. This is why most news headlines tend to be negative ones as people are more likely to stop and read such news.

Negativity bias is also present in trading. Traders generally feel bad when they have a losing trade and are not elated by their winning trades. Here’s a look at how to overcome negativity bias as a trader.

 

Celebrate your wins

The first and most important step in overcoming your brain’s negativity bias in trading is to focus on celebrating every winning trade. As traders, we tend to spend little time analysing our winning trades as we quickly move on to the next trade setup and ignore our wins. This is the main reason we feel very disappointed whenever we experience a loss as our brain thinks that all we have been doing is making losses.

Even if you’ve had 10 consecutive winning trades, one loss could leave you feeling very demotivated if you didn’t celebrate the previous wins. Therefore, you have to celebrate all your winning trades as this will allow your brain to build positive associations with trading and create a positive buffer whenever you have a losing trade.

 

Use proper risk management strategies

Another crucial way to stop negativity bias from affecting your trading is to use proper risk management in all your trades. One of the easiest ways to know if you are risking too much on a single trade is to ask yourself if you will be okay if you lose all the money being risked. Don’t focus so much on the numbers; instead, think of how you would feel if you lost the entire amount you risked on the trade. If you know that losing the amount you have risked on the trade would damage your account significantly, you should reduce your stake. Do not ignore proper risk management as doing so perpetuates the brain’s negativity bias and will derail your progress as a trader.

 

How to handle losses

There are two types of losses. The first occurs when you took the trade based on a particular setup that was later invalidated, leading to a loss. All successful traders know that losses are a part of trading and they plan for them by risking a small portion of their accounts on each trade and taking trades based on market structure.

However, most losing traders do not take trades based on high-probability trade setups and risk a large portion of their accounts one each trade. Therefore, losing traders tend to have massive losses and small wins as they cannot wait patiently for a trade setup to develop. These two kinds of losses are as different as night and day, and it is no wonder that professional traders handle losing trades much better than losing traders.

 

The science behind it all

The key to minimising the impact of negativity bias on your trading is to rewire your brain with positive emotions towards trading. By doing this, we can drastically reduce the negative impact that losing trades can have on our emotions and trading mindset.

Neuroscientists have discovered that the human brain can be trained to respond differently to situations over time, which is also known as neuroplasticity. Therefore, traders can change the way their mind reacts to losing trades and other negative situations that affect their trading activities by following the strategies outlined above.

 

The bottom line

These three strategies provide a complete formula for retraining our brains to minimise the negativity bias associated with trading. You have to celebrate your winning trades, no matter how small they are, by thinking about them and feeling happy that you won against other traders. You should always use proper risk management when placing trades so that you can comfortably sleep, even when you have open trades. Do not take unnecessary risks that will feed your brain’s negativity bias and lead to more losses.

Always trade like a professional, and you’ll find it much easier to take losing trades whenever they happen.

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