During my Premarket Prep on Tuesday I discussed an element of trading psychology that trips up a lot of traders.
I brought it up because we had two stocks on our radar that exhibited very similar price action on Monday, the 30th…
Up to a point.
One of those stocks was Fangdd Network Group Ltd. (NASDAQ: DUO):
DUO 5-Day, 5-Minute Candles Chart; Steady Trade
The second stock was XChange Tec.Inc. (NASDAQ: XHG):
XHG 5-Day, 5-Minutes Candles Chart; SteadyTrade
So where did the similarities end?
Well, DUO ran up Monday morning, pulled back, and then ran up even higher.
On the other hand, XHG ran up Monday morning, like DUO, and then fell off a cliff around 3:00 in the afternoon.
Many people were upset that they didn’t hold DUO longer, that they got stopped out and missed out on what could’ve been.
Coulda, woulda, shoulda…Hindsight is always 50/50!
And here’s what I had to say about that…
Be happy you were stopped out because even though you missed out on capturing that extra gain that came later, the odds of DUO failing were the same as XHG.
See, both of these are crappy pennies that are simply riding the Chinese stock pop right now.
To learn more about what’s happening with Chinese stocks, read my blog post from yesterday…
You can also tune in to my SteadyTrade podcast from yesterday, in which Matt McCall and I explored the China stock situation in more detail.
DUO and ZHG are equally bad in quality, so it follows that their price movements are equally impossible to predict!
These penny stocks are only suitable for day trading. Penny stocks, by nature, are volatile and move fast which is exactly why we have stop losses in place to protect our downside.
And if you use Oracle, you’re even better equipped to manage your risk because along with your stop loss, you get an entry price. So if a stock doesn’t hit the entry price, you ignore it and move on.
So what do we call this FOMO or disappointment that some traders felt by not holding on to DUO?
It’s called selection bias, and it happens to traders more often than they might recognize.
Table of Contents
What Is Selection Bias, Really?
Selection bias happens when you’re cherry-picking data in a way that skews your analysis.
This could mean focusing only on the “winners” that fit your narrative, while conveniently ignoring the thousands of stocks that didn’t meet your expectations.
This kind of bias leads to overconfidence, faulty strategies, and ultimately, financial losses.
Imagine you’re backtesting a strategy, and you decide to only look at stocks that had huge runs. Naturally, those stocks would make your strategy look bulletproof.
But what about the hundreds of stocks that didn’t take off? Ignoring those would give you a warped sense of how reliable your system really is.
How Selection Bias Can Mess With Your Head
One of the most dangerous things about selection bias is how subtle it can be. As traders, we’re wired to look for patterns. But if you only focus on the successful trades, it’s easy to convince yourself you’ve got the magic formula.
When looking at a bunch of past winners, you need to ask yourself, “How many similar setups failed miserably?” If you’re only analyzing the successes, you’re not seeing the full picture.
The reality is, markets, and penny stocks like DUO and XHG, are extremely unpredictable.
How to Spot and Avoid Selection Bias
So how do you avoid falling into this trap?
First, you’ve got to be self-aware. Admit to yourself that you have a tendency to focus on what worked and forget or ignore what didn’t.
This really is just human nature… but remember, the market doesn’t forgive the errors of human nature.
You need to be aware of your blind spots.
Here’s how to avoid selection bias:
Look at the full dataset – Don’t single out only the stocks that fit your ideal outcome. If you’re studying breakouts, look at all the breakouts, not just the big ones.
Backtest objectively – Test your strategy across all relevant stocks and market conditions. The goal is to find consistency, not just a few outliers.
Document your trades – Keep a trading journal where you record both wins and losses. Losses aren’t fun but they often teach us the most.
If you don’t have a trading journal, start one!
Watch my video to find out what things you need to include.
Ask, “What’s the downside?” – Every time you spot a winning setup, challenge yourself by asking, “What would happen if this didn’t work?” Thinking critically about risk will help you avoid tunnel vision.
To do all the things above, you need to have a robust trading platform that allows you to screen for stocks, create charts, apply technical indicators, and more.
StocksToTrade has all of the things traders like me look for in a platform. It also has a selection of add-on alerts services, so you can stay ahead of the curve.
Grab your 14-day StocksToTrade trial today — it’s only $7!
My Final Thoughts…
If you let selection bias rule your decision-making, you’ll just end up on a wild goose chase.
You’ll be after something that doesn’t exist, which is that you can always pick the winners and that the market will always work in your favor. Sorry, but it won’t!
The best traders out there look at the whole picture. They’re aware of their biases, and they actively work to overcome them.
Trading isn’t about perfection. It’s about making educated, informed decisions and learning from the outcomes—good and bad.
Focus on the bigger picture, practice your strategies, continue to educate yourself, and avoid the trap of selective memory. You’ll be in a much better position to survive the trading game.
And speaking of education, tune in to one of our free live webinars here at StockstoTrade.
They run all day and offer trading tips and tricks, information about how we use our proprietary Oracle system, and lots more.
Better yet, register for my StocksToTrade Advisory service…
Every STT Advisory member gets a monthly newsletter with my stock picks, three weekly videos, and more.
Have a great day, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade