Specialty Skills

Certainty Biases Can Put Your Trading in a Bind

Dr. Woody Johnson

Have you ever been caught up in should-ing on yourself? What I mean by that is, have you been thinking that the price action should (must) go up or down because of the trade you entered? That is just one example of the type of thinking that can throw a monkey wrench into your trading results. Let’s look a little closer at an illustration of this issue.

Karla frowned at her screen. The price action on the daily YM Emini chart had been in a mature symmetrical triangle price pattern, and it was not going up as she had expected or as she had outlined in her micro trade plan. In a few more minutes, the price action had dropped even further, very close to her stop. The anxiety and fear that she felt drove her to move that stop. It was almost as if she were in a fog or trance – a negative trader trance. The price action continued to fall and she moved her stop again saying to herself that it should go up and that it should do it soon. Unfortunately, she succumbed to her “certainty bias” and moved her stop twice more before the pain of the current loss overcame her fear of losing more by exiting, and she took herself out of the trade. “That was a high probability trade and it’s not supposed to do that,” she wailed. This was the fourth trade in a row that she had been either stopped out or had taken herself out; and, this last trade cost her dearly. It not only cost a significant amount of capital in her account, due to the fact that she had moved her stop three times; it cost her in emotional angst which hit hard in her self-esteem. Her head hung like an anvil was tied to her neck. She put her face in her hands as the room seemed to darken from the cloud of depression that was forming around her. She moaned through her fingers, “What is happening to me, it shouldn’t be like this.”

Actually, it couldn’t be any other way for Karla at that moment. It was true; she did have a high probability set-up according to her protocol and her trade plan analysis. But, high probabilities don’t ensure that the price action will do exactly as you expect. In fact, the phrase “high probability” by definition points to a lack of total predictability. So, even though Karla had a “certainty bias,” which prompted her to use the predetermined word “should” as in “it should break up” she still was operating from a limiting belief that the price action was going to definitely do what she had in her plan.

Let me digress for a moment to explain a little more of what a “certainty bias” is and why it is dangerous. There are two separate aspects of a thought, namely the actual thought, and an independent involuntary assessment of the accuracy of that thought.

Look at the two horizontal lines below to get a feeling for this separation of the actual thought and the assessment of the accuracy of that thought; it is the Muller-Lyer optical illusion. If you were to measure the actual length of these two lines and therefore would empirically know that they were the same length; you would experience this optical illusion as the simultaneous disquieting sensation that this thought—the lines are of equal length—is not correct. This isn’t a feeling that we can easily overcome through logic and reason; it simply happens to us; (and just check it out…it’s really strange isn’t it, they look to be very different in length).

A separate category of mental activity is the genesis of this sensation; that is, unconscious calculations as to the accuracy of any given thought. On the positive side, such feelings can vary from a modest sense of being right, for instance, as an understanding that summer follows spring, to an epiphany or profound a-ha, a sense of spiritual knowingness. The spiritual knowingness, or as William James called “the mystical experience” referred to it as a “felt knowledge,” a mental sensation that isn’t a thought, but feels like a thought.

Muller-Lyer optical illusion

So, as we look at Karla’s assessment of her thoughts about what the price action “should” do, her certainty bias proved to be a limiting belief which prompted the initial distracting emotions of frustration, frazzlement, and fragmentation, which distorted her judgment as in what to do. What she did do was to violate her rules, which in turn, caused her to experience a significant loss. Additionally, let’s not forget that she also had a secondary emotional distraction, which caused its own damage; that is, her feelings of depression and self-loathing. These secondary emotions are not only painful, but also can cause further behavioral consequences to include things like revenge trading, inability to pull the trigger, or other reactions that produce additional unwanted results.

It’s important to be careful about using words like should, shouldn’t, must, can’t, and gonna because they are the harbingers of the “certainty bias” when related to the price action and your trade. What you want to remember is to resonate with objective reality. One of the laws of the Universe is that of “cause and effect.” When a cause is set in motion, there is going to be an effect as in “you will reap what you sow” unless there is an intervention by some means and the conditions and circumstances change. In other words, the markets are going to reflect the conditions and circumstances that are present in the order flow; and, you’ll want to accept the reality of the charts rather than assume that the reality will change merely because you want it to. The price action should do exactly what it does, based upon the market conditions and circumstances present. So it is also with your results. You are going to get the results that you “should” get, based upon the personal conditions and circumstances present in your trade. In other words you executed your trade in just the right place, based upon just the right assumptions; and followed your rules – or not – in just the right way, in order for you to get the exact results that you did. And if you lost you “should” have lost, based upon the personal conditions and circumstances of your trade. As soon as you can “accept” the reality of the market and the reality of your causal behavior, you’ll be able to accept that you are getting the results that you “should” get. With this acceptance you’ll be in a better position to pay more attention to the conditions and circumstances that you are setting in motion at the time of the execution. You’ll be better able to focus on what matters most in the trade without the distorted judgment caused by a certainty bias. Additionally, with an acceptance of reality, you’ll be in a better position to avoid the secondary emotions, (like depression and self-loathing) that come from the limiting beliefs associated with thinking that you should have gotten a different result than you did. And, you can avoid the ineffective behaviors that these secondary emotions kick off … therefore you’ll be on target to plan the trade and trade the plan effectively, remaining on task and on target to get the results that you want.

Avoid the shoulds and the accompanying certainty bias, they can be smelly and really clog your system. When you are engaging your A-Game, you are less likely to be hampered by limiting beliefs and internal biases…at least you will be more self-aware and open to discovering them and when you do you can address them through mental and emotional tools. We teach A-Game mental and emotional tools in Mastering the Mental Game XLT, Online and On-location courses. We show you how to remain focused on what-matters-most in your trading in order to get the results that you want…consistently. Ask your Online Trading Academy representative for more information. Also, get my book; “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading,

Dr. Woody Johnson


This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.