Do you know why some individual investors keep losing money in the market despite years of experience?

The reasons are definitely multi-faceted. It could be due to inadequate technical skills, an imperfect trading system, or even poor mindset management. However, these are not the most critical reasons. The key factor determining a trader's ability to profit in the market is cognition.

Many traders subconsciously equate investing and trading with "speculating," expecting to easily earn returns of 50% or even over 100% annually. However, even renowned figures like Buffet or Soros typically achieve an average annual return of just over 20%. This is a typical manifestation of lacking cognition.

In trading, one can only consistently overcome human weaknesses and achieve stable profits by having clear cognition of the market, the future, and oneself.

A significant number of traders who can only make small profits or are falling deeper into losing streaks have fallen into cognitive biases. Cognitive bias is just one of the many biases, and to avoid falling into these pitfalls, it is important to first understand where the pitfalls are.

10 Underlying reasons why individual investors often lose money:

1. Confirmation Bias

The first "pitfall" is confirmation bias. Traders tend to rely on historical experiences to understand and predict trading events, and excessively trust these imperfect prior conclusions.

Widely recognized trading wisdom, such as not believing that the market will infinitely decline or the belief that "the trend is your friend," are merely convenient and expedient confirmation biases.

Unfortunately, these biases do not stand up to market scrutiny. During times of market uncertainty, traders tend to stick to these biases. While there may be occasional lucky profits, ultimately losses are inevitable.

2. Attribution Bias

Attribution bias, where individuals attribute success to their skill and failure to external factors or bad luck, has negative implications in trading. For example, during traditional American non-farm payroll data, if the results surprisingly outperform all analysts' expectations, resulting in losses for many, they may irrationally blame the analysts.

The quintessential characteristic of investors is that during a bull market, they think they are very capable, and during a bear market when they suffer heavy losses, they start blaming market makers and economic conditions, but never themselves.

The responsibility for the trading decisions rests on the traders themselves. The biases could stem from biased information gathering, incomplete understanding of information, or irrational investment decisions.

3. Herd Mentality

Herd mentality occurs in the markets every day due to the asymmetry of information, leading traders to make assumptions based on the behavior of others, or even simply follow others' decisions.

The unsettling fact is that the most crucial factor influencing herd behavior is not whether the opinion itself is right or wrong, but how many people agree with it.

Individual irrational behavior leads to collective irrational behavior and is commonly referred to as the herd effect. Individuals disregard the information they possess and opt for actions similar to others.

4. Framing Effect

The framing effect highlights that people's responses to specific choices differ based on the manner in which they are presented.

This is evident in trading when many traders find it difficult to follow a predefined strategy to either take profits or execute a stop loss within their predetermined plan. When facing losses, traders hope for a market reversal and may not adhere to the planned stop loss, as accepting a certain loss caused by a stop loss is even more difficult.

The framing effect is a major obstacle for most traders in allowing profits to run. For strategies with medium to low frequency, allowing profits to run while making the right decisions is crucial. The bias favoring certain returns is a major enemy for traders.

5. Speculator's Fallacy

The speculator's fallacy occurs when traders, after successive losses, mistakenly believe that their next trade will have a higher probability of being profitable. However, each trade is independent and their previous consecutive losses or gains have no bearing on the outcome of their next trade. The correct approach is to stick to the trading strategy regardless of incorrect estimations.

People who fall into the speculator's fallacy typically exhibit the following traits: making impulsive decisions based on gut feelings, unwaveringly sticking to their ideas, and if successful in a trade, they become overconfident in their abilities.

If unsure whether they have fallen into the speculator's fallacy, a simple way to judge is to observe if they have uttered phrases similar to: "The market has been falling for so long, shouldn't it rise now?"

6. Hindsight Bias

Hindsight bias involves mistakenly assuming that the result of an event is predictable after it has occurred. This can lead traders to overly optimistic views about their trading abilities, ultimately leading to failure.

This bias is commonly found among traders. After a market rally or decline, individuals often manage to conclude some bullish or bearish news. The analysis may not help in future trades, as a correct response before the event was not feasible. The right approach is to discard hindsight bias and maintain a respectful outlook on the market.

7. Affirmation Bias

Affirmation bias is a formidable mental challenge. Once a trader has formed a preconceived notion about something, even if that opinion is not clear, it is difficult for them to overcome the bias, which can also affect their view of a person or a trading instrument. Affirmation bias may unknowingly impact a trader's decision-making.

For example, many traders fall into the trap of affirmation bias when determining if a certain technical analysis theory can successfully predict market trends.

8. Overconfidence

This cognitive bias is easily understood as traders having an excessive belief in their ability. For many traders, overconfidence is deeply rooted and a staggering 90% of traders believe their abilities exceed those of other traders.

Overconfidence can lead to two outcomes: trading with overly large funds and taking risks beyond their capacity or holding on to losing trades due to excessive faith in themselves; eventually, this may lead to complete loss. For beginners, excessive confidence often leads to leveraged trading and refraining from stop-loss orders, even when they are wrong.

Confidence is essential, but overconfidence should be avoided, and one should strive to remain objective. This requires considering the risk aspect in every decision and contemplating the cost of failure before trading, rather than focusing on potential gains.

9. Confirmation Bias

Traders tend to select information that supports their views while overlooking unfavorable information. Traders with this bias tend to search for evidence supporting their viewpoints, while ignoring counter-opinions, and reasoning against their own views.

Confirmation bias is common among novice traders. When a trader is strongly inclined to go long on Gold, they often overlook contradicting views.

10. Availability Heuristic Bias

Traders make unconscious and emotional judgments, with frequent recent occurrences heavily influencing their decisions. People are inclined to think that easily recalled events are more likely to happen, known as the availability heuristic bias.

Traders influenced by this bias tend to give more weight to recent high-impact market events. For example, when selecting stocks, many prioritize those recently in the limelight, such as stocks linked to a recently speculated theme. This is a common example of availability heuristic bias.

Given the understanding of these cognitive biases, how can traders overcome these obstacles?

Recognizing these cognitive biases, traders should work to mitigate these challenges:

• Fully acknowledge personal limitations.
• Traders should be dedicated and continuous learners, constant learning aids in gaining a more comprehensive understanding of the market and the world.
• Always remember the unpredictability of the market.
• Constantly hone trading skills through live trading while aiming for trade consistency.
• Divide the entire trading process into effective steps to prevent cognitive biases from spreading throughout the process and to isolate problems during post-analysis.

In conclusion, overcoming and avoiding cognitive biases in trading is a process of constant self-discovery. For 99.99% of traders, there is still a long road ahead.