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One of the hardest thing for individuals to do when making investment decisions is to overcome our biases. A bias is simply a preconceived opinion that we may have regarding certain companies, sectors, or even an entire economy, which may prevent us from investing when the chart is telling us that we should. Biases can also cause investors to remain heavily invested in their favourite sector, even though the chart is telling us to get out.
For trend traders, it is extremely important that we leave our biases at the door when we make our investment decisions. As a technical investment strategy, trend trading assumes that all relevant information is contained in the chart. This makes sense because the chart represents the historical and present price action of a security and that price action is by definition the aggregate actions of all investors based on the entire body of knowledge that is available to them, both past or present.
All of this is extremely important because when the prevailing view that is presented in the media predicts one thing to happen, it often the exact opposite that happens. If we cling to our biases despite the chart telling us the exact opposite is occurring, it can cause us to miss out on some of the the most lasting and profitable trends or can cause to stay invested when we shouldn't.
As an economist and fundamental junky, this has been one of the hardest things for me to overcome in my own investing because I like to believe that my analysis is correct. One way to rectify this is to think about your investment thesis in the context of timing. It is quite possible to be entirely correct in an analysis but off on the timing by months or even years. If we can be open to the notion that our timing may be off, it can free us up to take a potentially profitable trade that we otherwise would not.
In the next blog post, I will describe two situations in which investors have been punished for clinging to their biases.....