Illusion of control

Illusion of control - This bias leads traders to overestimate their ability to influence market outcomes. For instance, a trader might think that by “manually” picking trades or by trading frequently they can beat market randomness. In automated trading, illusion of control may manifest as overtrading or excessive tweaking of strategy parameters to exert control. It is defined as a cognitive bias where individuals “overestimate their ability to control or influence outcomes”. In practice, it can drive a trader to ignore randomness and take undue risks. Algorithms can reduce this bias by relying on systematic, evidence-based rules and by setting limits (e.g. fixed RiskTolerance). The notion is reinforced by research: the illusion of control often leads to overtrading and market timing attempts, harming returns.