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Origins of Bias

Origins of Bias

by ScottFebruary 19, 2011

I’d like to do something completely different today. Mole and I both talk a lot about bias, how it will ruin your account and stop you from trading correctly. But for most of us, simply knowing that we are trading a bias is not helpful. If you are feeling a strong emotive reaction (something that feels like a “eat your broccoli” demand from your mother when you are 5 years old) to taking a long setup in this market… that is bias in action. If you are personally offended by the actions of the Bernank, thats bias too. If you reload several times a day, and cant wait for the STU to come out, thats probably a response to unacknowledged emotional pain as well. I’m talking about the emotive “I just can’t do it” that has stopped many of us from taking full advantage of the best bull market of the last decade once Elliott Wave stopped working and P3 was revealed to be garbage.

I’d like to explore bias in a little more detail than we have done up until now, and share with you various mental processes and disciplines that I use to stop one losing trade turning into a cascade of progressively stupider and stupider trades.


To our mind (psyche), whats most important to us is the success or failure of the trade we are in right now. Yet logically, what is truly important is the long run positive expectancy of whatever method we use. Losing this trade and the next one, and the one after that, makes no difference over a lifetime of trading.

This disparity between what seems to be important and what truly is important creates emotional pain, specifically fear. It is what we choose to do with this emotional pain that dictates how we will trade next. When we ignore emotional pain, we force the human mind to jump in and deal with it for us. This is the cause of virtually every trading problem you will ever have.

The human mind evolved as a problem solving device. Lock the keys in the car and you will be presented with a number of options…. where is the spare?, call AAA, find a big rock and smash the window, catch a taxi, etc.

The function of your mind is to solve problems. It is literally written into our DNA, you are the function of countless generations of selective inbreeding for problem solving ability. If you present it with a problem, it will try and solve it for you. It will hijack your reality to solve your problems. The problems in trading arise when you try and use your mind to solve emotional problems, which it is singularly incompetent at.

This happens because your mind interprets ANY EMOTIONAL PAIN, as life threatening, invoking flight or fight responses which are unsuitable for trading markets. Toughness, courage, determination… these are fine qualities in an entrepreneur, athlete, soldier…. but they will get you carried out of the markets on a stretcher. I should know, I possess all of these in abundance.


MIND: “You have problems. Let me take over, I am the problem solver. I have options for you. We could obsess about charts, distracting you from the crippling emotional pain. We could increase position size, rationalising that when it comes good in a day or two you will double benefit. We could screenwatch a long term chart, emotionally riding each up and down tick to present you with different emotions to cover the ones you have. I could simply stop you from noticing bullish evidence when you are short, that will stop you from experiencing pain. We could externalize a resentment, blaming our failure on the Ben Bernank or Prechter, temporarily blocking the feeling of shame and worthlessness we feel by judging others as inferior”

We have all done these kinds of things in response to a losing trade. Problem is, the human mind is a fabulous servant and a terrible master. When you let your mind start trading, hijacking your reality, you are doing the equivalent of handing a 5 year old an AK-47. Children should not be given automatic weapons! Believe it or not, your mind has a lot more in common with a 5 year old mentality than you would realise. Your mind will throw tantrums when it doesnt get its own way.

99% of traders lose because they all think the same. The common characteristic of losing traders worldwide is that they go to their mind for a solution to every problem. This is particularly so for super intelligent people.

Being very very smart is a hindrance to trading success. You must be “smart enough” to understand markets, if you are TOO SMART, you will likely have to do a lot of psychological work on yourself to avoid blowing up. Despite not having the traditional “smart guy” resume, my IQ tests off the charts, and I blew up leveraged accounts 6 times. Most of the worlds super-bright people are disaffected loners, resentful at the world and unable to function. Einstein didnt have an amazingly high IQ (152), he was “smart enough” to understand theoretical physics, no more.

You dont need to be smart to trade, just SMART ENOUGH TO UNDERSTAND TRADING

My point is this. We are part of a mind/body/spirit trinity, which eastern philosophical traditions have known for centuries. Now I’m not getting all hippy on you, what I want to discuss is the deep roots of bad trading.

Lets separate the three bits.

1) You. The part of you which has everything necessary to be profitable, today and forever. The part of you which is perfect and untouched. The authentic YOU, your spirit, your soul. If you have been trading unsuccessfully, you probably get GLIMPSES of this state. When trading feels effortless, you are in the drivers seat. Athletes describe this peak mental state as “in the zone”. Its critical to anchor this peak trading state when you experience it, so you can replicate it. This state of peak performance exists ONLY in the present moment. Fear of what might come next (fear of powerlessness), fear of loss (fear of being worthless if we fail in the markets), mental trauma from past trades…. All of these things are CONSTRUCTS OF THE MIND. These fears will stop you from being profitable, they are all illusion, and they do not exist when you operate from the present moment.

2) Your body. Like it or not you inhabit a sack of meat. Its no different than a dog or any other animal, it feels primal emotions all the time, fear is the most important. The problem with trading is that virtually any fear you experience your body interprets as life threatening.

3) Your mind. The mental voice most of us have. It attempts, all the time, to convince you that YOU ARE YOUR MIND. Psychologically the mind is like a 5 year old child, clever and precocious, but not wise. The nature of your mind is OBSESSIVE, like a dog with a bone, it wont want to let go of a losing trade or trading strategy, even when it is revealed to be poor.

If you stuck with wave theory long after it stopped working. If you prayed for p3 when it just wasnt happening. If you kept top picking and refused to get long… your mind was in control, and not you. Disastrous!

The most important thing you must understand before beginning any internal work, whether its psychoanalysis or buddhist meditation, or anything else is that YOU ARE NOT YOUR MIND. Your mind is chatter, your mind is distraction and obsession.

When I was 22 I bought my first cool car, a lotus elise. It was a truly awesome little sportscar, and I had lots of fun in it. When Porsche released the 996 shape 911 I was convinced that I had to have one, that this car would make me truly happy. And it did, for about 2 weeks. The following year my mind told me that I would be happy if only I had a black ferrrari 360. And I was, for about 2 weeks. Insanity is repeating this process, again and again.

This is how the mind works. It says “sorry about lying to you all those previous times, but this time the car/woman/sunglasses/shorting the es futures is the one thing that is guaranteed to make you happy forever”

Giving in to the tantrums of the mind is like scratching a mosquito bite. It feels heavenly while you are doing it, but stop for a second and you are itchier than ever!

For many of us the feeling of trading badly has all the characteristics of addiction, its incredibly painful emotionally and has the key components of all emotionally self-harming addictions , obsession and compulsion. The obsession, that further analysis will somehow make a bad trade good, and the compulsion to trade even when we are losing, it has all the hallmarks of a serious drug addiction and emotionally its identical. The insanity that this time will somehow be different is no different than the insanity of a crackhead or heroin addict.

This last week I traded well for the week, exceptionally in some respects (though it was not mistake free). I passed on a seductive, but foolish, top picking exercise which in earlier years would have had me all in short. I am particularly pleased with my decision to exit my long euro trade at the 1.3620 level, and reenter when it broke to the upside. However I was stopped out of a yen trade which, to my eyes was particularly promising.

Since that was the last thing that happened for the week, I woke up in CRUSHING EMOTIONAL PAIN.

Now we get to the meat of the situation here. Pay attention.

The pain is FEAR. Its a physical pain, it HURTS. What is it?

There are primal fears which virtually all fear is made of. The two relevant to trading are fear of worthless and fear of powerless.

– Fear of being worthless. This idea, that if we fail in the markets we will be NOT WORTH LOVING, is interpreted by the body as “IF WE CANT SUCCEED IN THE MARKETS NOBODY WILL LOVE US AND WE WILL DIE” As I said before virtually all fear is interpreted by the body as a flight or fight life threat, causing a flood of brain chemicals that guarantee you trade badly.

– Fear of being powerless. Fear that we need to know the future or have some control over our environment to stay safe in the markets. This is why wave theory and cycles are seductive. The idea, that we can know the future, that we need to know what will happen next to stay safe, is a classic illusion of the mind. The mind believes that if we cannot stay safe we will DIE.

The best trading comes from an emotional place of “I dont know what will happen” I explicitly express my powerlessness over the markets, out loud, every single day that I trade. There is a taoist saying “invest in the loss and let the mind be free”, if you start from a place of not expecting to win you wont be surprised by anything.

Question: Imagine you have a dog. The dog is scared of thunderstorms. It starts to HOWL WITH PRIMAL FEAR when the lightning and thunder starts. Do you lock it outside where you dont have to hear it whining? Or do you let it sit inside, with you, and soothe it? Are you compassionate towards it in its fear, knowing no better, or do you rationalise that it cant die from the thunder so it should just harden up and stop bothering you?

Your body is no different than a dog. Its a sack of meat, and when you lose a trade it experiences FEAR. When you go to the mind for a solution, you IGNORE THE PAIN AND FEAR OF THE BODY. In this action you sow the seeds of future bad trading.

Going to the mind for the solution is the cause of every problem we have in the markets.

Think about this simple but powerful statement. When your body experiences fear it is essential for you to not abandon yourself (in drink, food, drugs, obsession, rationalisation, sex, consumerism, anything) but to stay present, experiencing the fear equally with it. If you do that your MIND WILL NOT TAKE OVER, and the stupid trading that often follows a losing trade WILL NOT START.

Emotions are unpleasant. Fear is painful. What is self harming, is to force your body (sack of meat) to go through painful experiences alone. Over time, you can stop mentally running away from pain and towards pleasure. When unpleasant emotions have no hold over you the bias will stop.

All bias is a function of unwillingness to experience emotional pain.

Think on it!

Market Update!

OK Every market went up, except the NQ. So if you took the foolish top picking scenario, you are not stopped out yet if you took it in NQ (as advised), but the odds of this working are less than 50/50 now.

No doubt wavers will be emboldened by the textbook 5 min 5 down then 3 up wave. Im inclined to agree with them, but I dont have any actual factual basis for this, so this must be counter trend bias seeping in.

Bottom line. We have $indu still dramatically stronger than the other indexes, NQ failure to follow is very stinky for further upside. We still have no reason to get short, but the long case is very suspicious. Leading stocks like AAPL and NFLX not making new highs with the broader index is not indicative of a turd of a turd wave, which is the big fear here.

My advice, stand aside from this market until we get some real downside. The form of the downside will tell you EVERYTHING. A few days of sideways working off an overbought condition is a very good buy, and a retest after a quick shakeout is a very good short.

The real news is the dollar.

There are only two things that can happen now.

1) Highest probability option is now that the dollar is beginning its terminal phase, we need to see a breach of the trendline to confirm.

2) Still a reasonable, but not highest probability outcome is a SAVAGE bear trap, seeing early dollar bears trapped the wrong way, and providing the impetus for the first move of the dollar rally.

The Euro shows it quite clearly. My squeeze chart shows the bollingers squeezed inside the keltners. Statistically, this indicates an overwhelming probability of a massive move in either direction, no way to tell which one.

Now if you are long, as I am, the odds favour a test of the upper bollinger. If it passes that test, we could breach critical support in DXY and you want to get and stay long for the trade of the decade as Bucky halves in value very quickly. Now what I suspect is the higher probability outcome is that we go up to the upper bollinger, paint a sell setup and fall like a rock, trapping Euro bulls wrong-way.

Overwhelmingly the odds favour one of these scenarios. Now I’m not the sweat off an option trader’s armpit, but I’m sure some of you option gurus could come up with a crap-tac-u-lar strategy for this, especially with the $vix where it is 😉

How do we know which is going to happen? The trigger point on this weekly retest variation buy setup is what I’m watching

About The Author

  • ds2

    I like this Scott. I took Jan. off from alcohol, sugar and other “fun” things I like to imbibe. I feel better, clearer, more grounded. Of course now it's Feb, I have had a few drinks and a little sugar, but staying away from some of the other things that can cloud my mind – for now… Oh – I also lost 4 pounds around the gut ; )

  • convictscott

    Next month is 5 years since I have had a drink, drug, or anything to change the way I feel. Personally my experience is that being able to avoid emotional pain through substances makes it very difficult to do the emotional work necessary for me to become profitable.

    I know good traders who drink heavily and snort coke with racing nostrils on…. but it doesnt work for me

  • IndigoLaoWai

    Brilliant. Thanks. It is so true that many of us have “wished” for a big fall in the markets to feel vindicated. Especially if we have already been stopped out of many a short position. I have to acknowledge that is a hard bias to overcome, and painful to reflect on the short bad trades and losing out on the winning long trades.

  • convictscott

    I posted an update with some pertinent charts. reload

  • convictscott

    The solution we have nearly all ingrained is to distract from emotional pain. Eat pizza till you feel sick. Obsess over internet shopping. Dont think about it. Watch TV.

    Unfortunately turning away from a fear of feeling shame over failure in the markets ends up causing us more shame, to the point where we can traumatise ourselves and never be able to trade correctly

    Unfortunately turning away from a feeling of fear of being powerless over market direction will ultimately give you more of what you are trying to avoid also. We try and exert power over our surroundings by finding a guru or method that promises the future. As always, when this doesnt work, we end up feeling more powerless over the markets than ever.

    The solution, once you accept that everything else is doomed to fail, is to face those uncomfortable feelings head on. Being a good trader wont save you from them. I woke up at market close at the end of the week and felt like I'd been punched in the stomach. A trade with $17,000 profit in it was wiped out.

    Despite the fact that it was wiped out according to a set of rules which guarantees long term profitability, it still hurt. I choose, today, to FEEL THAT PAIN. When I disconnect mind body and spirit, abandoning my body to feel like shit by itself, it creates a whole range of unpleasant bounceback effects.

  • convictscott

    Alexander Elder advocates traders using 12 step fellowships, like Alcoholics Anonymous, mentally substituting “markets” for alcohol.

    So step 1 of AA would be “I was powerless over the markets and my life became unmaneageable”

    There is some wisdom in this

  • crush1618

    Great write up! Thank you.

  • SW6

    Convict Scott thank-you for this post. It's direct and thoughtful; your posts always have this quality. Fear is the 800lbs gorilla we sometimes pretend ain't there, but of course fear always has to be faced/managed.

    You really addressed a lot here Scott; many ideas nested in this post.

  • Onorio

    Wow that was intense! Very good indeed scott +1

    I was looking at you DXY setup and looknig at USDCAD daily chart, could it be considered the same setup? A buy above 0.9973 with a stop @ 0.9917?

  • convictscott

    Onorio, CAD is a little opaque to me atm, I really liked it as a buy a few days ago, and I'm not sure if me still liking it is an echo left over from that. I'd like to see a retest of the 9916 low, which would make everything much clearer.

    Gut call, I suspect it wants to go up, but $spx hasnt let it yet.

  • Onorio

    Radioactive MOLE!

    Radioactive leak alert issued at South Korean nuclear power research center – Yonhap

  • Onorio

    I`ve my reserves to CAD too, i don`t put money there a long time. The question was if the 2 las daily candles could be considered the same setup you`ve posted in DXY. We got a rejection of 0.9816 low twice, followed by a move to 0.9870, could the break of 0.9870 be bougth?

  • 5LeggedInsect

    Does Elder suggest a substitute for God in the 12 step program?

    No disrespect to people who have overcome addiction through the 12 step program, but surrendering to a higher power to help you out with your trading problems, and connecting to that higher power through prayer, seems like a pretty bad idea to me.

  • jesterx

    Check out this guys analysis on the Aussie dollar chart.
    WoW!!! Better watch it like a hawk!!

  • Onorio

    EURUSD breaking, Aussie breaking, looks like USD is doomed :/

    0.80-0.87 W1
    0.87-0.83 W2
    0.83-1.020 W3
    the ascending triangle as W4 and if W1=W5 we might get a ride to 1.0700, better keep an eye on that.

  • molecool

    How do you think I acquired my trading super powers?

  • Speculator

    Excellent. Knowing when the probabilities favor a trade is much less important than knowing what to do when the trade fails. Just because you lose on a trade it does not mean you did not work hard enough to prepare or that your system is broken.

  • Gold_Gerb

    “A stranger was seated next to Little Johnny on the plane when the stranger turned to the Little Johnny and said, “Let's talk. I've heard that flights will go quicker if you strike up a conversation with your fellow passenger.”

    Little Johnny, who had just opened his book, closed it slowly, and said to the stranger, “What would you like to discuss?”

    “Oh, I don't know,” said the stranger. “How about nuclear power?”

    “OK,” said Little Johnny. “That could be an interesting topic. But let me ask you a question first. “A horse, a cow, and a deer all eat grass. The same stuff. Yet a deer excretes little pellets, while a cow turns out a flat patty, and a horse produces clumps of dried grass. Why do you suppose that is?”
    “Jeez,” said the stranger. “I have no idea.”
    “Well, then,” said Little Johnny, “How is it that you feel qualified to discuss nuclear power when you don't know sh!t?””

  • Onorio

    I was thinking that you`re from GS…or the FED perhaps.

  • ds2

    5 years is very commendable Scott. Good for you!

  • EmptyHand


    Great Post! I have been reading for a while but this inspired me to say “Right on!”.

    I have lost an easy six figures with this whole bull ramp…not because I don't like the market to go up….but I had a bias that things “needed” to go down….big mistake.

    Thank you for your insight.

  • convictscott

    The higher power in a 12 step program is not necessarily a religious god. Praying for trading help is indeed silly, its not my experience that god is a market interventionist !

    It is literally “a power greater than yourself” In the context of trading I think of the markets as more powerful than me, and I surrender to the fact that no additional amount of looking at charts, no additional amount of canvassing opinions and gurus, is going to help me overcome the simple fact that I DONT KNOW WHAT HAPPENS TODAY. I also think that I need help from a trading system which is more powerful than my own system, and I hand my account balance over to that system daily.

  • amokta

    Looks like Scotts view that silver miay go up seems to be right 🙂 well early days yet, plus hols tomorrow

    By the way why is oil up, there isnt trouble in the Mid East or something (!)?

  • convictscott

    AUD at the moment is totally in thrall to the SPX. IMO doing a chart of the AUD without considering spx is very faulty.

    We have 2 propositions.
    1) USD breaks support to the downside, spx keeps inflating up, and AUD breaks its triangle to the upside targeting fresh highs and beyond
    2) USD holds support, spx gets meaningful pullback, and aud fails to breach triangle top

  • convictscott

    Prechter admits he was wrong

  • convictscott

    Amotka, odds favour further upside, but wide swings getting there. If you are going to hold, a very tight stop is probably inappropriate

  • amokta

    No silver position (only do the etfs when NYSE open), but watching

    p.s. prechter – only seems part admission of being wrong 🙂

  • amokta

    CS, you said some setups don't work well as 'continuation' patterns, but surely, this is against logic, as if a market is trending (at least moving in said direction), then any set-up that goes in that direction should have good success, just by 'the run of the green'

    anyway, off to sleep so happy futures trading !

  • convictscott

    One particular pattern, the fakeout inside period. The reason is that on the breakout of the inside period there is a spike high just above it, and there is no way to tell if the breakout from the old high will be successful or not. There is still an edge there in that the wins are larger than the losses, but the win percentage goes down to 50/50, so the edge is too marginal to bother with imo

  • 5LeggedInsect

    More like a “it was wrong to be short but that will only make me more right in the future” admission 😉

  • Gold_Gerb

    wrong? more like 'sorry'.

  • Joe_Jones

    I guess the market can start with P3 now.

  • molecool

    “In a lengthy e-mail, however, he pointed out that he hadn’t said the big crash would take place overnight.”

    REALLY? I have literally dozens of STUs that prove the contrary. Right, they were written by Hochberg, so maybe Prechter has an excuse. Bottom line is this: All of those 'market analysts' are snake oil sales men and they know how to hide behind carefully scriped langauge. How many of their subs did interpret EWI's newsletters are extremely short and medium bearish and thus got positioned that way? I am sure the dozens who wrote me are not the exception. Case closed.

  • BT310

    Thank you for the great post. Know of any Lobotomists in LA? The zero-hedge/mish noise(though factual) has given me a horrible bias. The cause-effect rationalization my mind performs is amazing(Outbreak in Egypt? No way the Spoo breaks 1310). As a chartist, I realized that had I been isolated with only a trading platform and no news feeds, i'd be retired at 30. I guess I feel special when I trade a fib extension and am right. The reality is i have a 75-80% profit-loss ratio when I wait for confirmation and trade the intraday wave 3/C. My ego wants to be first in line to catch the top/bottom tick. Thanks again