I used to receive hate-mail when I would write about a particular bearish play I was analyzing in the option markets. It always came from people who were long the stock that was in play. It shows just how strongly emotions come into this game of trading.
It is human nature to look for confirmation of what we already believe. The confirmation bias, as it is known, is well studied by behavioral economics. It is a major hurdle for traders.
The best traders actively fight against the confirmation bias. They seek out reasons they are wrong, not confirmation that they are right. George Soros is well known for this method. Ray Dalio, the founder of the largest hedge fund Bridgewater Associates has created an entire culture around it (http://www.bwater.com/Uploads/FileManager/Principles/Bridgewater-Associates-Ray-Dalio-Principles.pdf).
Constantly looking at how you might be wrong as opposed to how you are right does a few things for your trading. First, it helps you to refine your thesis. It forces you to reevaluate your positions, which is a good thing. More importantly, it can help you get less tied to your holdings.
This leads us to another well known and studied bias, the ownership bias, or the endowment effect. We place a greater value on things when we own them. There is a clear implication for trading. Once we buy a stock we value it more highly and are often unwilling to part with it. Traders sometimes call this “marrying” a position. It is detrimental to the bottom line.
This is one of the reasons that I am such a strong advocate of trading rules. You should trade from a thesis. You should test that thesis. When the thesis is no longer valid, you get out. But you also get out when certain things happen. You might have a rule that if an option position gets cut in half, you sell it. If it doubles and then pulls back to even, you get out. These rules should be hard and fast, so the tricks our brains play on us don’t come into play. It is even better if you can automate such things, which is not all that hard to do with certain trading platforms.
You must, of course, have the conviction to pull the trigger to trade. But you also must be very careful not to get married to your positions. Using hard and fast rules can help you bypass your biases. And that will help you be more profitable long term.