Trading: Having a Bias

Most of what I see on Twitter labels having a ‘bias’ while trading as bad. They say it locks you into a fixed way of thinking, causes you to fight the market when wrong, etc. I couldn’t disagree more.

Let’s start by defining what we mean by ‘bias’ here. I’m talking about having a directional bias, a read on the market that has you bullish or bearish biased. I’m not talking about all the human biases like recency bias and such, which pretty much all get you into trouble. I think the good version of a directional bias on a session is very powerful, but it has requirements to make it the healthy kind. Let’s dive in.

For years now I’ve posted some form of premarket prep for a trading community, whether it be simple images indicating bullish/bearish/neutral inflections like it is currently; or detailed 10-minute videos like I’ve also done. Each day this is me conveying info on my bias for my students and subscribers. Sometimes my bias is nonexistent- that is I’m entirely neutral. Sometimes I’m clearly bullish. Sometimes there is dissonance where we have bullish from below, and bearish from above creating conflict until resolved. Each of these is important reads on the market, and I suggest you learn how to see markets this powerfully. Why am I telling you all this? Because I just want to say that I walk the walk in terms of displaying just how important it is to have a good bias. I’m not just writing an article for kicks here.

So, more to the point, what are the good ingredients for having a healthy bias? A good one needs to have: 1) a point of invalidation, 2) an understanding of the significance, if any, of the invalidation, 3) a detailed way of knowing exactly how you will determine if we’re above/below the level, and 4) potential destinations for the bias completing.

We’ll discuss each below.

A point of invalidation

If you have a bullish view, for example, you must know exactly where that contextual idea is wrong. This is the biggie, right off the bat. People think a bias locks them into a way of thinking, but actually, a healthy bias, with a point of invalidation, gives you tremendous flexibility. You won’t be fighting a trend all day if you know exactly where your bias is invalidated. You’ll change your view when that happens, and will have considered that scenario or hypo before the market ever opening.

Also, note we’re not talking about the same thing as a stop loss. We often talk about stops as being where the trade idea is wrong. While that is true, harnessing the power of multiple timeframes adds layers to this concept. You may have a short-term stop out, at a point where momentum invalidates your attempted well-timed entry. This can be entirely different than the prices on the chart where your directional bias would become invalidated. This is of course a style choice and a way of trading I love due to its amplification of R/R.

So to reiterate, a healthy bias is going to have a place where it’s no longer valid. If we’re bullish coming into the session, it needs to be something like, “I’m bullish as long as we’re holding above the 3765-3770 area; if we accept and hold below this area, I’m bearish (or standing aside and neutral biased).”

An Understanding of Invalidation Significance (If Any)

Some of my very best trades have come from situations where my initial bias is invalidated, and the market is having what I call a contextual shift. These can provide powerful moves because 1) many people are wrong, and new players are hopping in, and 2) I am in tune with this shift, rather than the more stubborn traders who will be just losing more (to me). So this would be a situation where there is high significance to invalidation of my bias. This isn’t always the case though. Sometimes a bias getting wrecked doesn’t mean as much. It could very well put us into a situation where we enter an area of dissonance as timeframes compete for control or just an area with no real interest.

This is important because having a good bias (or knowing where you don’t) is crucial. Not only that, but it’s a repeating process constantly. You might want to read this section a few times. Not only is it telling us where we have a strong read (or weak/no-read) and is a constantly repeating process of new biases forming, but it’s also important to note where we are within the overall cycle of these unfolding. I won’t go into detail on that here, as it's a topic for a later date- you know in 6 months or so when I write another blog post.

So, when you have a bias with a good “line in the sand” where it either holds or gets invalidated, always think about if/when that bias gets invalidated what situation would you be in. Is there an opportunity going the other way? Low opportunity into a potential choppy dissonant area? Know in advance and plan for it in your premarket preparation.

A Detailed Way of Determining if the Bias is Holding or Invalidated

Sounds simple, but I find that most traders don’t have this down pat. Let’s say we’re bullish from an area, we have a bullish bias as long as we continue to hold above this area. Ok great, but exactly what would change that. What if the market starts to drop and we get 1 tick underneath your “line in the sand” for that bias? Does that invalidate it? Are you bearish now? Yeah, yeah, probably not, I get it; but the point is where will you determine the invalidation? This is where I usually get blank stares. Ok, so it’s not 1 tick, is it 10 handles? Probably not that either, but what is it for YOUR PROCESS?

I won’t go into details here on how I do this and train students, but I will say that you want this to adjust with market conditions, namely volatility. In higher vol conditions you’ll need to see larger moves through an area to invalidate it than you would normally need in normal/low vol conditions. Makes sense, but few use this in the actual process.

Come up with a documented process for how you will determine this, and don’t be like most traders leaning more and more forward in their chairs, trying to find truths that they don’t even know rules for. Don’t be that stressed out trader scampering for answers. Know your process, sit back, and let the trades come to you. (Ding, lightbulb, it’s impossible to do this without leaning on an actual process).

Know Potential Destinations for Any Bias

I’m essentially saying, “have targets” here, which I know is insulting your intelligence, but bear with me.

Great targets are not whatever bracket orders you have set up with OCO’s. Great targets are not your desired multiples of risk. Great targets are not a dollar amount you want to make today. Great targets are not dollar amounts that get you back to ‘green’ on the session.

Great targets are determined by the market; by market-generated information; and that alone. 

At any given time, for those who know, markets are showing us what they’re trying to do. That means we have a directional bias, a point at which that changes/invalidates, and an area the market is working towards as a potential destination. And this is before ever even looking at an intraday/shorter-term/execution type of chart. Entirely contextual and higher timeframe. Yes, sometimes we don’t have this read, because of what we talked about earlier- as we enter a new repeating cycle of invalidation/bias/destination view sometimes it’s complex or dissonant or just not offering much asymmetry. 

Learn how to see an area the market is currently trying to get to. This isn’t magic, and I’m not saying I know the future - ever - at any point in time. In markets, anything can happen, and things can shift on a dime, but at least I know what the market is trying to do, and where that changes- and therefore what it is then trying to do, including a new potential destination.

Just yesterday I was discussing a mentee’s day and he targeted out of his short position pretty quickly, essentially basing it on recent measured moves. I was quick to point out that this was a perfect contextual situation to expect range expansion and above-average rotation size given the very important contextual bias shift that had occurred. 

Have a framework to see all of this. Join us in deploying our NADRO approach if you dare.