I believe that survivorship bias is one of the most sabotaging mindsets for traders. A diligent student of the markets is analyzing hard data every day, both his/her trades and all the valid setups that "could've been" and then extracting statical probabilities from the hard data, and defining specific rules that produce the strongest overall results through varying market conditions.
However, most students are learning randomly, using indicators without putting in the hard work, trading off emotion, and so on. These traders then remember certain outcomes that fulfill existing belief systems and unconsciously (or sometimes consciously) discard outcomes that do not fulfill existing belief systems.
Here's a common existing belief: If the market shows you some profit, take it; no one ever went broke taking profits.
The trader develops a bad habit of moving stops too quickly to lock in profits, fearful of taking a loss after there was profit showing. "What kind of idiot would I be to let a profit turn into a loss?" the trader thinks.
In the process of doing this, some trades will continue favorable without retracing and the trader files this away in the "See, a real trade that's going to go your way goes your way and stays going your way, so there's no reason not to move the stop quickly to lock in some profit" mental file drawer.
Some trades will stop out break even or for a very small profit and then run all the way to where the full stop loss would be hit, and the trader files this away in the "See, good thing I moved my stop right away and avoided that loss" mental file drawer.
Many trades will stop out break even or for a small profit, and then before ever hitting the stop loss price, will turn and run in the favorable direction to full target or well beyond, and the trader feels quite frustrated. The feeling of frustration is a negative feeling. The feelings associated with the previous two scenarios are positive feelings. The trader in these final scenarios discards these trades; they don't create a positive feeling.
Here we have survivorship bias in action.
So the trader will continue to cut profits except on those rare trades that run fully in his/her favor from the start, and on trades that plain don't work, will be taking full losses.
Traders definitely go broke taking profits if the profits are tiny, and the losses are full. Many traders in this phase of learning will move stops to break even or small profits instinctively, yet never consider immediately stopping out of a trade early that doesn't go in their favor right away. Heck no, they have to give the trade room! Yet when it comes to the very reason for trading - taking strong profits on a consistent basis - they strangle their opportunities over and over again because they remember what felt good (the trades that ran nicely out of the gate and preventing winners from becoming losers), but discard what felt bad (exiting a really good trade for little or nothing).
It wasn't until I began analyzing hard data every day, all the valid setups that could've been, and then extracted statical probabilities from the hard data, and defined specific rules that produce the strongest overall results through varying market conditions, that I saw the light. Every day you meet a few losers on the road to consistent profitability. For every 2 or 3 small losers I take by letting a green trade reverse to red and stop me out, I have 5 or 6 big winners by letting green trades reverse to red and then move back in my favor to target or beyond.
This ability came from hard cold facts, not from subjective experience and selective memory, where we tend to filter out that which does not fit our belief systems.
