Sensory-derived bias

Sensory-derived bias is a psychological phenomenon that falls within the scope of trading psychology. A subset of trading instincts, one of three more specifically, this bias is said to refer to the idea that the information that we use to form opinions is biased.

The obvious challenge here is recognising that information that we perceive as fact may actually be steeped in some form of bias. This is of particular concern if one considers that we use information around us to function day to day, or to acquire specific knowledge.

In the context of trading, the source of information is of particular importance, as is the messaging. For example, a trader may follow a particular media outlet to monitor the markets. 

Based on the information that the specific outlet provides its audience everyday, the trader may formulate a specific opinion stemming from what he considers to be fact.

What the trader may not realise, however, is that the media channel may be presenting certain information based on its own sets of biases, which in turn influence the opinion of the person listening to them. This may become further exacerbated if only one side of a story is being presented. The more one hears just one part of a tale, without any evidence to the contrary, eventually that tale has the potential to turn into the only practical stance on the subject.  This creates a biased opinion due to a lack of counter evidence.

Mitigating bias in trading

It requires a concerted effort to not fall prey to biases like sensory-derived bias. However, being mindful or aware of their influence on trading decisions is half the battle. The other half is taking the steps to limit psychological obstacles. This looks like something as follows:

  • Reading charts in a way that is based on hard data rather than perception. Remaining objective is key.
  • Gaining a robust understanding of how markets operate by engaging in continuous learning. This includes knowing what factors drive market movements and price volatilities. Knowledge is key in making decisions based on objective probability rather than on feelings of fear or greed.
  • Avoiding the opinions of others, or at least limiting their impact on your own financial decision making process.
  • Using technical indicators to better understand market psychology and behaviour.
  • Building a trading plan that is fundamentally based on what it is we want to achieve. Remember that we are reactionary beings by nature. By having a clearly defined  plan in place helps us maintain a measure of self-control, common sense, and discipline.   
  • Remember, limiting the adverse effects of poor trading psychology is a process comprised of many different parts. Ensure you cultivate a positive and realistic mindset to handle challenges or setbacks.

Set achievable goals to manage expectations more effectively, but also acknowledge that mistakes are a part of the process.