What is Perceiving – External Cause Effect and how does it relate to trading? What traders should know about it and avoid costly trading mistakes?
Perceiving External Cause-Effect, also known as External Locus of Control, is a cognitive bias where individuals attribute the outcomes of events or situations to external factors beyond their control, rather than recognizing the role of their own actions or decisions. In trading, this bias can have significant implications, potentially leading to poor decision-making and trading mistakes.
How Perceiving External Cause-Effect Relates to Trading
Blaming External Factors: Traders with a strong external locus of control tend to attribute their trading successes or failures to external factors such as market manipulation, news events, or the actions of other traders. They may believe that their trading outcomes are determined by luck or circumstances rather than their own skills or strategies.
Lack of Accountability: Traders who perceive external cause-effect may avoid taking responsibility for their trading decisions. When facing losses, they are more likely to blame external factors rather than examine their own trading strategy, risk management, or emotional biases.
Inconsistent Trading: This bias can lead to inconsistent trading behavior. Traders may frequently change their trading strategies, indicators, or assets, believing that external factors are the primary drivers of success. This inconsistency can result in poor performance and missed opportunities.
What Traders Should Know and How to Avoid Costly Mistakes
Self-Awareness: Recognize your own tendencies towards perceiving external cause-effect. Understand that while external factors can influence the market, your trading decisions and strategies play a crucial role in your outcomes.
Accountability: Take ownership of your trading decisions and outcomes. Even when external factors play a role, analyze how your actions contributed to the results. This self-accountability is essential for learning and improving as a trader.
Consistency: Develop a consistent trading plan and stick to it. Avoid making frequent changes to your strategy based on external events. Consistency in your approach can help you better assess the impact of your decisions over time.
Risk Management: Implement robust risk management techniques to protect your capital. Regardless of external factors, having appropriate stop-loss orders, position sizing, and risk-reward ratios can help mitigate losses.
Continuous Learning: Stay informed about market developments and news, but don’t solely rely on external information for trading decisions. Continuously improve your knowledge, skills, and trading strategies.
Emotional Control: Emotional reactions often arise from a perceived lack of control over external factors. Develop emotional resilience and discipline to avoid impulsive decisions driven by external events.
In summary, perceiving external cause-effect in trading can lead to a lack of accountability, inconsistent trading behavior, and poor decision-making. Traders should strive for self-awareness, take ownership of their actions, maintain consistency, practice risk management, and focus on continuous learning to minimize the impact of this bias and make informed trading decisions.
Trading Example – External Cause Effect
Let’s say a trader named John has been actively trading stocks for several months. He has had mixed results, with some profitable trades and some losses. However, lately, he’s been experiencing a series of losses that have significantly eroded his trading account.
John begins to attribute his losses to external factors beyond his control, such as:
Market Manipulation: He believes that market makers and institutional traders are conspiring to manipulate stock prices against him. He thinks they are intentionally triggering stop-loss orders to cause his positions to get liquidated.
Economic Events: John blames his losses on economic events like interest rate changes, government policies, or geopolitical tensions. He believes that these events are causing wild and unpredictable market movements that are impossible to predict.
Financial Media: John also points fingers at financial news outlets. He claims that their sensational reporting and “fake news” about stocks are misleading retail traders like him, leading to poor trading decisions.
Other Traders: He often mentions that other traders, especially those with more significant capital, are manipulating stocks by creating false hype or spreading rumors to profit at the expense of retail traders.
Due to this perception of external cause-effect, John becomes increasingly frustrated and disheartened. He feels helpless and believes that successful trading is out of his control due to these external factors.
Avoiding the Pitfall
To avoid falling into the trap of Perceiving External Cause-Effect, John should:
Self-Reflection: John needs to reflect on his trading decisions and strategy. Are there aspects of his trading that he can improve, such as risk management, entry, and exit strategies, or position sizing?
Education: Rather than blaming external factors, John should focus on enhancing his knowledge and skills as a trader. This includes understanding how market makers operate, staying informed about economic events, and critically evaluating financial news.
Risk Management: Implementing effective risk management techniques, like setting stop-loss orders and position sizing, can help protect John’s capital during volatile times, reducing the impact of external events.
Emotional Control: John should work on controlling his emotions and not making impulsive decisions based on external news or perceived market manipulation.
In essence, while external factors can influence trading outcomes, traders should maintain a balanced perspective. Taking responsibility for one’s decisions, continuously improving trading skills, and practicing effective risk management can help mitigate the negative effects of Perceiving External Cause-Effect in trading.
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Noshee Khan has made a profound impact on the financial sector, primarily through his groundbreaking venture, Trade Genie. With a deep understanding of market dynamics and an unwavering commitment to empowering individuals, Khan has led a substantial revolution in trading strategies. As the driving force behind Trade Genie, he lights the way for aspiring traders by providing them with invaluable insights, educational resources, and real-time market analysis. Khan’s steadfast dedication to enhancing accessibility in the trading industry has garnered widespread recognition, enabling numerous individuals to gain financial literacy and self-sufficiency.
Under Khan’s guidance, Trade Genie effectively bridges the gap between newcomers and experienced traders, fostering a vibrant community that places a premium on the exchange of knowledge and strategic advancement. Serving as both a visionary and a mentor, Noshee Khan propels the achievements of Trade Genie and serves as an inspirational figure for those seeking to confidently navigate the complexities of the financial landscape.