Sensory-derived bias

Sensory-derived bias falls under the umbrella of trading psychology, or more specifically, trading instincts. One of three categories, sensory-derived bias is based on the premise that we form opinions using biased information.

The challenge that arises is our ability to recognise that the bias exists and that the information we consume may be tainted by it. This becomes particularly pivotal when most of the choices we make day to day are based off cues we receive externally. And many contain bias that we are totally unaware of or unwilling to consider so construe the information as fact.

In the scope of trading, this concept has significant relevance as trading decisions are made using external resources, media outlets, forums, etc. Using this information, a trader will choose to enter or exit a particular position if he or she believes this data to be true and factual.

However, what the trader may fail to realise is that the messaging that they receive from that source may be steeped in bias, influencing not only their own credibility but also the trader’s decisions.

This risks that this may incur increase exponentially if the messaging is one-sided, especially if no counterevidence is being presented.

And repeated enough times, the listener, i.e., the trader, may start construing that message as fact, and using it to execute trades.So how does one reduce the risk of bias in financial decision making.

Well, for one, it requires having the awareness that any information, regardless of the source, must be verified. It also requires acquiring a good understanding of the financial markets and the factors that drive prices and trends.

Additionally, traders must ensure they don’t allow the views of others to sway their decisions. Instead, a trader must make use of proper research and analysis to make informed trading decisions.

This involves becoming skilled in technical analysis to be able to read price charts and use technical indicators to understand why markets are behaving a particular way.

Remember, acquiring a wide scope of knowledge instils confidence that will see you rely on data rather than feelings, emotions, or the opinions of others to execute specific trades.

Another way to mitigate sensory-derived bias is to build a trading plan. An effective plan is one that includes the several key components:

It takes into account your tolerance for risk.
It considers your objectives, what you want to achieve.
It aligns with your budget and expertise.
It incorporates risk management techniques to protect your money.
It also defines the criteria by which you’ll trade.

It’s clear that sensory-derived bias poses a significant challenge in trading psychology, whereby external information carries biases that can influence decision making processes.

In the context of financial trading, this becomes more concerning, being that there is considerable reliance on external sources for market insights. Recognising these biases requires heightened awareness and a solid understanding of market dynamics.

It also requires a trader to stick to an effective trading plan so that they can navigate the markets with greater ease, confidence, and resilience.