The Truth About Blind Spot Bias in Trading & How to Overcome It

Think about how easier it is to judge a situation when you’re not the one in it. Consider how quickly we notice mistakes in others, whether it’s a friend making a bad financial decision, a colleague mishandling a project, or a trader holding onto a losing stock for too long. But when we’re in the same position, we often justify our actions, convinced that we see things clearly. This is due to cognitive biases explored in trading psychology, including Blind Spot Bias, which prevents us from recognizing our irrational decisions.

The Blind Spot Bias is a cognitive bias where we recognize biases in others but fail to see them in ourselves. This bias can lead traders to make poor trading decisions, take unnecessary risks, and ignore warning signs in financial markets. Traders must pay attention to this bias because it leads to overconfidence, risky decisions, and repeated mistakes. But most importantly, it’s probably the hardest bias to spot. Let’s break down how Blind Spot Bias silently sabotages your stock trading and how you can detect it and remediate it.

Blind spot bias makes traders believe they’re rational while dismissing the possibility that they’re making emotionally driven decisions. This bias of loss aversion influences investment decisions, leading to impulsive and suboptimal choices. Here’s how it typically plays out in stock trading:

• Ignoring Bad Trades While Criticizing Others: You might scoff at another trader for holding onto a losing stock, yet justify your bad trades with excuses like “the market was unpredictable.”
• Overconfidence in Your Trading Strategy Thanks to a Few Profitable Trades: You assume your approach is sound because some trades worked out in the past. This aspect of overconfidence bias is linked to the Dunning-Kruger effect, where traders overestimate their ability.
• Blaming Market Conditions Instead of Evaluating Your Mistakes: Instead of recognizing flawed execution, traders blame volatility, brokers, or “bad luck.” This tendency for people to externalize failures rather than analyze their own errors in thinking can lead to repeated negative outcomes.

This bias creates a dangerous cycle. If you don’t acknowledge your blind spots, you’ll keep making the same mistakes—often without realizing it.

The best way to fight Blind Spot Bias is to remove discretion from your trading and adopt a systematic approach. A trading system is a structured set of rules that tells you exactly when to enter and exit trades, eliminating emotional decision-making. Here’s why systematic trading works:

• Objective Decision-Making: Rules are tested before use, ensuring every trade follows proven logic rather than gut feeling.
• Prevents Overconfidence Bias: With a properly backtested system, you no longer assume you “just know” what will work. Now you have the data to prove it.
• Protects Against Emotional Reactions: When the system says sell, you sell. No room for hesitation, doubt, or irrational hope. This eliminates biases in trading and improves the quality of trading decisions.

Many traders think they are following a system, but unless data back every decision, it’s just disguised discretionary trading. Technical analysis, price action, and historical market activity can help traders make rational decisions rather than relying on mental shortcuts.

Even systematic traders aren’t immune to Blind Spot Bias. There are a few cases where systematic traders can also be affected, such as:

1. Cherry-picking backtest data involves tweaking parameters to fit past market conditions instead of creating a system that works across all conditions. This leads to inaccurate predictions and poor trading decisions.
2. Not Reviewing Their Own Execution: Some systematic traders will assume they’re following their system perfectly but don’t actually check if their trades align with their rules. A reality check through continuous learning and self-assessment is crucial.
3. Refusing to Abandon a System That No Longer Works: The market evolves, but traders with Blind Spot Bias may stubbornly stick to a failing strategy instead of adapting. A wise decision would be to adjust the approach to market analysis based on actual market trends.

The best weapons against this are continual review and refinement. A system should always evolve based on real data, not wishful thinking.

If you want to eliminate Blind Spot Bias, you need structured, measurable practices to keep yourself accountable. Here are five key strategies:

1. Journal Every Trade

• Write down why you took each trade.
• Compare your actions with your system’s rules.
• Identify patterns in mistakes to uncover blind spots.

2. Conduct Objective Backtesting

• Never assume your system works. Instead, test it over decades of historical data.
• Use out-of-sample data to ensure your rules hold up across different market conditions.

3. Use an Accountability Partner

• Find another trader (or a mentor) to review your decisions objectively.
• Since the human brain is wired to spot biases in others more easily, trading communities can help with independent evaluation.

4. Set Fixed Trading Rules—and Stick to Them

• If your system says to exit, don’t rationalize holding longer.
• Follow position sizing and risk management rules without deviation.

5. Accept That You Have Blind Spots

• The most dangerous traders are those who think they have no biases.
• Acknowledging psychological biases and behavioral biases can prevent costly trading mistakes.

Blind Spot Bias in Trading is dangerous because it makes you believe you’re seeing clearly when you’re actually missing key flaws. The only way to overcome it is to follow an objective, systematic approach and continuously review your decisions.

By understanding the market context, avoiding the sunk-cost fallacy, and maintaining a balanced trading approach, you can make informed decisions and reduce suboptimal decisions.

 If you’re serious about eliminating cognitive biases and becoming a 100% confident, rule-based trader, the Trader Success System is your solution. Apply now and upgrade your trading strategies!

Trading Psychology and Psychological Bias Articles

To dive deeper into how other psychological biases affect your trading psychology and decisions as well as practical ways to overcome them, explore the articles below. For a comprehensive guide on mastering your mindset and building a resilient psychology, visit our Trading Psychology page.

• Action Bias in Trading
• Ambiguity Aversion in Trading
• Anchoring And Adjustment in Trading
• Anchoring Bias in Trading
• Authority Bias in Trading
• Availability Heuristic in Trading
• Bandwagon Effect in Trading
• Bias Blind Spot in Trading
• Choice-Supportive Bias in Trading
• Commitment And Consistency Bias in Trading
• Confirmation Bias in Trading
• Conservatism Bias in Trading
• Contrast Effect in Trading
• Decoy Effect in Trading
• Disposability Effect in Trading
• Disposition Effect in Trading
• Dunning-Kruger Effect in Trading
• Endowment Effect in Trading
• Escalation Of Commitment in Trading
• Familiarity Bias in Trading
• Framing Effect in Trading
• Gambler's Fallacy in Trading
• Halo Effect in Trading
• Herd Mentality in Trading
• Hindsight Bias in Trading
• House Money Effect in Trading
• Hyperbolic Discounting in Trading
• Information Bias in Trading
• Loss Aversion in Trading
• Money Illusion in Trading
• Narrative Fallacy in Trading
• Neglect Of Probability in Trading
• Normalcy Bias in Trading
• Optimism Bias in Trading
• Ostrich Effect in Trading
• Outcome Bias in Trading
• Overconfidence Bias in Trading
• Paralysis By Analysis in Trading
• Pessimism Bias in Trading
• Recency Bias in Trading
• Regret Aversion in Trading
• Representativeness Heuristic in Trading
• Salience Bias in Trading
• Selective Perception in Trading
• Self-Attribution Bias in Trading
• Status Quo Bias in Trading
• Sunk Cost Fallacy in Trading
• Survivorship Bias in Trading
• Trading Psychology in Trading
• Zero-Risk Bias in Trading