Helping you become a successful Trader.

Confirmation Bias

ďIt ainít what you donít know that gets you into trouble. Itís what you know for sure that just ainít soĒ  -  Mark Twain

One of the many pitfalls in trading / investing is Confirmation Bias.

Confirmation bias is the tendency of people to pay attention to information that supports one's conclusions and consciously or unconsciously ignore information that is contrary to the conclusions.

Those who allow themselves to fall victim to confirmation bias when making investment or trading decisions in financial markets eventually pay dearly for their sins. They end up staying in trades / investments well after they should have been abandoned.

For example Ė A Trader enters a position and then focuses mainly on the Indicators, Chart Patterns, Data Points, Statistics, News or Market Behavior that supports staying in the position. Any contrary information is consciously or unconsciously ignored. When the trade goes wrong the bias makes it difficult to accept mistake and square off the position. The stop loss is not adhered to. The loss is usually booked when itís too painful to sustain the confirmation bias resulting in a large damaging loss.

What can be done to avoid this?
  • Always accept unconditionally that "Markets are always right, Quote / Price on the screen is all that matters".
  • Technicals, Fundamentals, News, Statistics; no matter what you follow, always understand that none of them is infallible or absolute.
  • Avoid the need to always win or be always right in the markets.
  • Know your risk and reward before taking the trades and be prepared mentally for taking a manageable loss.
  • Paying attention to dis-confirming evidence is naturally difficult. Intentionally look out for contrary information in fresh market data.
  • Often it may be difficult to get an instant answer to "why" a trade is going wrong. Just stick to stop loss decided as per risk reward.

Often the losing trades in hindsight give us valuable experience / insights for things to do and things to avoid in future. Manage your losses and profit would take care of itself !

ďIt is the mark of an educated mind to be able to entertain a thought without accepting itĒ ~ Aristotle