Why Smart Traders Keep Making the Same Mistakes

Hey {{first_name}},

When I was working as a therapist, I spent years with people whose brains were absolutely convinced of things that weren't true. People in the grip of addiction who genuinely believed they had everything under control. People with eating disorders who looked at their bodies and saw something completely different from what was actually there.

And the thing that always struck me was how smart these people were. How functional. How capable they were in every other area of their lives. And it took me a long time to understand that their brains were doing exactly what brains do. They were filtering reality to match existing beliefs.

Same thing happens in trading. Your brain filters the chart to match your thesis. It filters recent trades to predict future outcomes. It filters risk based on what's most memorable, not what's most likely.

So, today I want to talk about the four lies your brain tells you that blow up trading accounts. These aren't character flaws. They are the same cognitive patterns I saw in therapy, just pointed at charts instead.

Here's the thing though… You can't think your way out of cognitive biases. If you could, they wouldn't be biases. So we need a different approach.

This is confirmation bias, which is your brain's tendency to seek out information that supports what you already believe and ignore everything else.

In my earlier trading days, I blew my account in three minutes because of this one.

CPI was coming out and I was absolutely certain the number was going to tank the market. I had done my research, had my thesis, and I felt really strongly about it.

Then the number came out and the market didn't tank.

Instead of thinking, "okay, I was wrong, time to exit," my brain started making up reasons why I was still right. "It's going to drop in a second. This is a fake pump before the real dump."

And I started averaging down. Three minutes later, my account was gone.

Sound familiar?

Once your brain forms a belief, it goes into evidence collection mode. But it's not collecting all evidence. It's collecting evidence that confirms what you already think. Everything else gets filtered out.

Your brain has something called the reticular activating system, and it's basically a filter that decides what information gets through to your conscious awareness. This system is biased towards information that matches your existing beliefs.

Think about when you buy a new car and suddenly you see that car everywhere. Same thing happens in trading. Once you've decided NQ is going to break out, your brain filters for bullish signals. The bearish signals are still there, but you're just not seeing them the same way.

And the thing is that confirmation bias gets worse when you're stressed. When your identity is wrapped up in being right, your brain fights even harder to prove it. Because being wrong isn't just about the trade anymore, it's about who you are as a person.

Before you enter any trade, write down three things that would prove you wrong. Specific price levels, specific indicators, specific market conditions, etc. Then set alerts for those levels. Because in the moment, your brain is going to explain away why that signal doesn't really count. The alert forces you to look at it.

This is recency bias and it’s your brain's tendency to weigh recent information way more heavily than older information.

Your brain has a working memory that can hold about seven pieces of information at once. Because of that, it prioritizes recent stuff because recent information feels more relevant to survival.

Let’s say you have a strategy that's been profitable for six months, and then you hit a two week drawdown and suddenly you're convinced it doesn’t work anymore. Or flip it. You've been losing for weeks, then you hit one good day and increase your position size because you've clearly turned a corner.

When you fall into recency bias, you're basically trying to determine the color of a 500 piece puzzle by looking at the last three pieces you placed. Those three pieces might all be blue, but that doesn't mean the puzzle is blue.

You need external memory. Start tracking your actual statistics over a meaningful sample size, at least 30 trades, ideally 100. When you're feeling like everything has changed, look at your rolling stats. Has your win rate actually dropped from 55% to 40%? Or did you just lose your last three trades and your win rate is still 54%?

Write down rules about when you're allowed to change your strategy. Not feelings based rules, objective rules. "I will not modify my strategy unless my expectancy drops below X% over 50 trades." Sign it like a contract.

This is overconfidence bias, and it’s your brain's tendency to overestimate your knowledge and ability to predict outcomes.

For example, my second trade ever was a full port YOLO options play where I made $400 on a $1,000 account. In my brain, I was a genius. Trading was easy.

So I took that $1,400 and full ported the Robinhood IPO… After the move was already done. I thought I was going to turn it into $14,000.

I lost everything.

This was textbook overconfidence bias because I had one successful trade to go off of. That's not a sample size, that's an anecdote. But my brain saw "I did a thing, I made money, therefore I'm good at this thing." And that one data point became a pattern.

This is the Dunning-Kruger effect. And it’s where people with low competence in a specific area of life tend to overestimate their ability in that area because they don't know enough to realize what they don't know. But the irony in all of this is that the better you get at something, you often feel less confident because you start seeing how complex everything really is.

Before you enter any trade, write down your confidence level. "I'm 70% sure this trade works." and track it. At the end of the month, look at all your "70% sure" trades and see how many actually worked.

Most traders are massively miscalibrated in their confidence. Your 80% trades work maybe 55% of the time. It’s important to keep tracking this because it’s showing you that your confidence levels and your accuracy don't match up. Once you see this, your brain can start adjusting from being overconfident to building confidence.

This is availability bias, which is your brain's tendency to judge how likely something is based on how easily you can remember examples of it.

You see, your brain uses memory as a shortcut for frequency. And if you can easily remember examples of something, your brain assumes it must happen a lot. But memorable things and common things are not the same.

Let’s say you had one massive loss holding through earnings, maybe you lost 20% of your account in one night and that loss crushed you. Even if you look at your data and see you've held through earnings 30 times and 25 of them were profitable, it doesn’t matter. The brain feels pain 2.5x greater than reward. So now, because that loss hurt so bad, it’s more memorable in your mind than the 25 profitable earnings. So every time you're holding into earnings, your brain is screaming danger.

That one catastrophic loss is so vivid that it feels more real than all the boring wins combined.

You need base rate data. It helps to track your outcomes by category. How many times have you held through earnings? What actually happened? Not the one time you remember. All the times.

Write it down. "Held through earnings 32 times. Won 23, lost 9. Average win $240, average loss $180. I’m net positive."

Now when your brain is screaming danger, you can look at your data and see that actually, it's been profitable. Your brain will still feel scared, that's normal. But when you have this data to compare your emotions to, you're not letting fear make your decisions anymore. You're letting data make your decisions.

You can't eliminate cognitive biases. Your brain is always going to take shortcuts, but you can build systems that catch the biases before they cost you money.

Notice that every single intervention I gave you is about taking the decision out of your “in-the-moment” brain and putting it somewhere external: checklists, written plans, data tracking, alerts.

Because your “in-the-moment” brain is compromised and no longer seeing reality. It's seeing a filtered, distorted version of reality optimized for survival and energy conservation.

When I was working with clients in therapy, one of the hardest things to help people understand was that their brain wasn't messed up. It was doing exactly what it was designed to do. Same thing goes here. Your brain isn't sabotaging you on purpose, it's trying to keep you safe using tools that worked for thousands of years. The problem is those tools don't work for trading.

Building systems to override your biases doesn't mean you're weak. It means you're smart enough to know that willpower isn't enough in the moment. The most successful traders I know are the ones with the best systems in place for “in-the-moment” emotions, not those who are the most disciplined.

And every professional trader will catch themselves in these biases from time to time still because it’s how the brain works. It doesn’t matter how successful and in control you are of your trading, sometimes the brain is going to do what the brain wants to do and that’s okay. It’s normal.

I caught myself in these biases just the other day. Last week I had to physically walk away from my desk because I was getting defensive about a losing trade and I could feel confirmation bias taking over. The difference now is I can catch it faster. And when I catch it, I have a protocol in place to stop it from taking over.

Your homework: Pick one bias, the one costing you the most money right now. This week, build one system that helps you catch it. Write it down, put it in your pre-market routine, set up the alerts, do whatever it takes.

Don't try to fix all of them at once. Pick one, build a system, and follow it for a month. You’ll be surprised at the data you collect and control you start to build.

Want to go deeper on this topic? This week's podcast episode is all about identifying and fixing the bias that's costing you the most money. I'm breaking down:

Listen wherever you get your podcasts or click here.

Talk soon!

Sarah