How Action Bias Will Sabotage Your Trading If You're Not Careful

action bias leads to less trading profit
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Action bias is the compulsion to "feel" like you're doing something, even if what you do isn't necessarily productive. Most of us have a tendency to "re-organize" our email or desktop--to make ourselves feel busy--when there isn't anything specific we need to do. Another example is popping some pills when we feel a cold coming on or when we get sick, even though the pills don't really help. Doing something feels better than doing nothing.

The action bias is a trap for traders, and a tendency each trader must overcome if they hope to succeed. There are times when action is warranted, but most of the time--actually nearly all the time--you don't need to do anything except watch the market.

The Action Bias in Day Trading

Assume that you trade for two hours a day. That's 120 minutes, at 60 seconds a minute, for a total trading time of 7200 seconds. How long does it take to place an order to trade? One or two seconds? If you mange the trade, adjusting stop loss and target levels, that may take another one or two seconds.

If it only takes two to four seconds of actual activity to make a trade (entry, management, exit), and that leaves a lot of free time to mess it up. If you trade eight times in the two hour period, you have at most about 32 seconds of actual physical activity where you are actively doing something real with the trade.

For the other 7,168 seconds, you are sitting there, trying to occupy yourself, whether you are already in a trade, or waiting for one to pop up (see How Often a Day Trader Should Trade).

If a successful trader spends about 32 seconds, making 8 trades in a two hour period, what are they doing the rest of the time?

That's where discipline comes in. The successful trader recognizes their moment of opportunity and takes it. They then do nothing until it is necessary. If a stop loss and target order are placed at the time of the trade, they may do nothing for the rest of the trade. Eventually, the price will touch the stop loss or target, and the trade will be over. In this case, there was only a second or two of physical activity when the trade as placed, and that is it.

The unsuccessful traders feel compelled to do something. They want to be engaged in the money making process, thinking that the more involved they are the more money they will make. This is false. More "doing," when it comes to trading, isn't necessarily better.

Why Trading Is So Hard

Part of the reason trading is so hard is because you need to act only at specific times based on your strategy. If trading for two hours, very active traders may make 8 to 10 trades, maybe even 12. Less active trades may only make 2 or 3.

The active trader is actually doing something specifically with their trades for maybe 40 seconds out of a possible 7200. That means the trader is only actually doing active trading for about 0.55% of the time they are sitting at their computer.

The other 99.45% of the time they need to stay focus on only acting when they are supposed to. That is hard.

While strategies vary by trader, ultimately you still have to act at the right time, and not act during the rest of the time. Your 20/30/40 seconds of placing/moving orders may be at different times than someone else, but you're both still actively trading for less than 0.6% of the time you're watching your screen. And that is if you only trade 2 hours. If you trade longer the amount of time you have to stay disciplined, compared to how often you act, will typically increase.

Thinking of it in those terms, if you just randomly buy and sell, as many want-to-be-traders try to do, your odds of success are minimal. You may have a few winning trades, but ultimately the market gives you so much opportunity to mess up that it's hard not too...unless you have a solid trading plan and the discipline to stick with it.

Most people think winning a trade is a 50% chance--it either goes up or down. While that is sort of true, there are infinite combinations of how that occurs. The price can move up, then down, down then up, or go up then consolidate and then go up again. We must also factor in the magnitude of price waves. One up wave may be much smaller than another, or vice versa. Winning isn't the only thing that matters; how much we typically win and lose on each trade is also important (see Day Trade Better Using Risk/Reward and Win-Rate).

Avoid Being Destroyed By Action Bias

Have a plan and stick with it. Realize that not doing anything is often good. When you are in a trade, sometimes it is best to just sit there and avoid the compulsion to close it out. Act only when your plan tells you to act. The market gives you almost infinite opportunities to mess up. Where always looking busy may be helpful (sometimes) in the real world (but also stressful), in trading it isn't recommended.

Most traders lose money, and most people feel that compulsion to do something. If you want to succeed, don't be like most people. Work on your discipline. Day trade in a demo account, and work on sitting through those very uncomfortable moments when you want to make a trade or adjustment that doesn't align with your plan. 

Developing the discipline to control the action bias won't come over night. It could take months or even years before you get a really good handle on it.

Learn to sit quietly and just watch when it isn't time to act. This will teach you much more than trying to impose your will on the market...and will be much less costly.