BarroMetrics Views: Overcoming Bias 2
Yesterday we saw how I have acquired a bias for the short side in the GBPUSD. By the way, this is inevitable once we form a view of the side that is likely to produce a low-risk, high probability profitable trade.
At this point, I analyse the pair with of my Trader’s Timeframe lenses.
The first step is to list my observations, then categorise them as ‘bull, bear, or neutral’. Following that, I look to integrate the information and assess the probability that the downtrend is likely to continue or change.
Before I move on to the next item in the analysis stage, ‘zone’ (where will I take the trade), I consciously look for information against the bias. This step seeks to ensure I am not suppressing information or falling prey to the heuristics that have proven to be my Achilles’ heel: representativeness, anchoring, framing and confirmation.
Let’s look at the ideas in action. (My trader’s timeframe is the 18-day swing).
In the GBPUSD, I have assessed a downtrend that is likely to continue to in the higher timeframes. Figure 1 shows the 18-day (red line), and 13-week (black line) and 12-month (green line) daily equivalents. They swing lines show the trends: monthly, quarterly and yearly respectively.
At first glance, the 18-day downtrend seems intact. If that were the case, my strategy would be to go long in the sell zone around the current swing highs, or upon a break of the most recent swing low.
But, when I actively looked for ‘long’ info, I saw:
So, by looking for ‘non-confirmatory’ clues, I have changed my initial views of where to take trades and the likelihood of an 18-d trend change. (A rally to the PSZ at 1.3434 to 1.3210 would break previous 18-d swing highs and thus negate the 18-d downtrend).
The process may seem complicated. But, as with most habits, it’s only difficult at the beginning. Once internalised it becomes second-nature – though I still use a check-list to ensure I consciously cover all bases.
We’ll never totally eliminate the biases occasioned by our mind’s unconscious reasoning – nor would we want to because they serve an invaluable function. But, by being self-aware, we can reduce their adverse influences when their use would lead us astray.
So, over to you: what are you common biases?
(By the way: ECB rate decision announced tonight at 16:30 HK time – may stimulate an increase in the ranges [at least of the majors and European crosses])
FIGURE 1 GPUSD 18-day and higher swings
FIGURE 2 GBPUSD 18-day swing