Psychology is an important concept in trading and investing. expert Technical and basic The analyst who does not focus on it for him emotions He often loses money.
But emotions are not the only thing a trader has to manage; As we have already seen, some biases (personal tendencies) can influence our trades.
In this article, we will focus on an important psychological concept known as Bias for the status quo and how it affects your trading results.
What is the status quo aligned?
The status quo bias is important concept found in psychology. It indicates where People prefer things to stay the way they are other than change. In most cases, people who have a status quo bias tend to be Fear that change will have a bad or negative outcome.
For example, a combustion engine-focused automaker like Toyota could have siding with the status quo by avoiding investing in electric vehicles. Likewise, a company that has been successful in operating in a certain way may be afraid to change its strategy.
A good example of this is companies that think 4 working days – weeks. Most companies think this is a bad strategy because the five hour work week has worked so well for them.
The status quo is A psychological concept that works across all industries. For example, in education, schools can prefer to teach in a certain way that has worked well over the years. In manufacturing, companies may avoid testing new ideas.
The status quo bias is best explained using the common proverb:
If it isn’t broken, why fix it?
An example of status quo bias in finance
A perfect example of siding with the status quo Warren Buffett. For decades, he has invested heavily in value companies that have plenty of cash flow and profitability. In this period, it is Avoid investing in growth technology Companies like Apple and Amazon.
He then invested in Apple in 2016. While the investment has made him a lot of money since then, he has lost most of the gains that occurred in the past few decades.
The current situation in trading and investment
The status quo also occurs in day trading and investments. While this may not be a very big problem for the long-term investor, this can be very detrimental to the day trader.
Let’s take a look at the most common ways this bias manifests itself.
The current situation on the assets for trading
One way that the status quo bias occurs is in the assets that people trade or invest in. As you probably know, there are many types of assets in the financial market, including StoresAnd the currenciesAnd the goodsexchange-traded funds (ETFs), cryptocurrencies, and more.
Below these categories are other types of assets.
In currencies, there is forex Majors And the the palace while in StoresThere are such groups growth And the the value or Technique and consumer goods.
So, some Traders can have a bias for the status quo From Trading in a specific asset And afraid to delve into other assets. They fear that these changes will have an spillover negative result on their performance.
Status quo bias in trading strategy
The other way this bias works for the status quo is on trading strategy. Refers to a situation in which the trader is They are afraid to change their trading approach. They fear that a change of approach will likely lead to huge losses.
But what if that was their strategy already brings losses? Bias can also have an effect here, preventing a trader from improving their strategy.
The solution to bypassing this problem is very simple. With the help of the demo platform, you can test your strategies with historical data and see how they would have performed in certain situations.
You can’t have 100% confidence (it’s impossible), but it’s a great starting point to see if a new strategy can be effective.
Our partners can also take advantage of our proprietary demo platform to test their strategies (or improve their skills), TMS™.
The status quo is biased in time
The other way the status quo bias works is At the exact time. For example, some traders have success trading at certain times of the day. Some have success trading during the morning hours while others struggle trading in the evening.
In these cases, these traders may have difficulty adjusting to the new trading hours. However, it is true that certain hours, such as the first and last, generally offer the greatest opportunities for profit generation.
Triggers of bias for the status quo
There are several key factors for the status quo bias when trading and investing. Let’s analyze the most common of them.
Loss aversion
An important concept in decision making is that people tend to You fear their potential loss instead of their earnings. For example, if you had to place $1,000 on a bet, you would often think about how you could lose that money rather than the potential winnings.
Likewise, in a situation with the status quo bias, traders often think about potential losses rather than what they can change. Loss aversion is also another prejudice that you can fall into.
Fixed costs
In most periods, traders have Already spent a lot of timeAnd often money, in a particular strategy. For example, they have spent many years trading different assets using different strategies.
Therefore, the sunk cost factor Refers to a situation where they fear that change will be costly. Instead of wasting more time on a new strategy, why not focus on what worked?
open
This is an important concept which means that people prefer the things they are used to rather than the changes.
More often than not, we are all exposed to the status quo other than the new change. this is Explain why a lot Seasoned investors and traders Avoid encryption Because they have been exposed to traditional assets.
How does the status quo bias affect traders?
The status quo bias has some negative effects on day traders. A good example of this is Warren Buffett, who focuses on stock value. By doing so and ignoring the developing companies, he Missed opportunity to invest in quality companies Such as Google, Facebook and PayPal.
As such, while he has done well over the years, he has missed out on the opportunity to make more money in these companies.
The status quo bias has some serious consequences for traders, including:
- Not adapting to new conditions For example, a trader may fail to adapt to new conditions such as highly volatile conditions.
- Miss a lot of opportunities By staying fixed on one idea, you will miss a lot of opportunities that appear in the market. Warren Buffett’s example is a good one to look at.
- Falling into trade traps Sometimes the status quo can lead to traps like overconfidence.
How to overcome a biased situation
Well, maybe by this time, you might be a little afraid of falling victim to this prejudice, too. Fortunately, there are several ways to help you beat it, in addition to the demo platform mentioned earlier.
SWOT analysis
One useful concept is embracing SWOT analysis. SWOT is a strategy to look at powerAnd the weaknessAnd the opportunityAnd the the threat for new strategy or assets.
Taking the time to analyze will help you become more successful.
Put a little box for trials
Furthermore, you can avoid the status quo bias by fFocus on your main strategy and create a small fund for attempt new ideas.
For example, if you have a $100,000 account, you can allocate $5,000 of it to trading new assets with new strategies.
You might object that it doesn’t make sense to set aside some money when you can rely on the demo platform, right? Well.. there are some gaps between trading in a protected environment, without risking money, and doing it live.
And sooner or later you will have to check whether this new strategy is profitable or if it is wrong, right?
Discuss with other professionals
You can resolve this bias by talking to your teacher or other team members. These discussions will help shape your trading approach.
If you don’t have a mentor or don’t work in a team, you can always ask for advice on forums, social media (reddit has many communities to join) or platforms like Discord.
summary
We have realized that the status quo bias is one of the worst that can affect our trades; Choosing not to change in an ever-changing environment like the stock market can cost us many huge and huge losses.
Fortunately, this bias is easy to recognize, and you can safely get around it by adopting some of the solutions we’ve seen.
Useful external sources
- Two problems for the trader: overconfidence and bias for the status quo – Capital.com
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