One more bearish bar follows, pushing against a support level. (Does not notice that although it had a small range, it has a wider range than the preceding bearish bar.) (Does not notice that the bullish bar has a small range.)Ī bearish bar prints. You think that the market favors a long position, and you want to buy.Ī new bullish bar prints on the chart. This bias leads to a vicious cycle that ends in self-deception. As a result, we become less aware of the fact that we are affected by confirmation bias. As we give more weight to things that confirm our thoughts, we become more confident.
Hence, we tend to place more weight on information that confirms our position. We like them when they confirm what we think. We do not like people or information that contradicts our thoughts. We should make sure that we have a larger sample of trades across a longer period, before arriving at useful conclusions. However, in practice, we should not examine them and draw conclusions too often. Reviewing your trades and learning from them is crucial. Learn from your trading results over a more extended period. Lesson & Practiceĭon’t learn from recent experience. By turning to trading range break-outs, you could be giving up a valuable edge in your trading style. Then, you switched to trading range break-outs.ĭue to your recent experience, you overlooked that most of your past profits came from pullback trades. Hence, you concluded that pullback trading in a strong trend is a losing strategy. Thus, in trying to improve our trading results, we avoid trades that remind us of our recent losses.įor instance, you lost money in three recent pullback trades in a healthy trend. In the market, this cognitive bias can manifest in over-learning from recent losses. Our brains naturally put more weight on recent experience. To keep up this delicate balancing act, analyze historical data, but do not hold on to past conclusions. Yet, we need to look at new observations continuously to follow the market flow. In this sense, it compels us to be anchored to past information. Technical analysis requires us to look back in time for support and resistance to frame the current market. Recognise what the market is telling you, now. The lesson is one that warns against stubbornness. The fact is you were anchored by the first bullish thrust. (Essentially, you were anchored to the information glimpsed from the “strong bullish thrust.”)Īlthough the market showed clear signs of exhaustion, you maintained that it was bullish.Īs the session ended, you realized that you spent the day (and your trading capital) fighting the market. You were convinced that the session would be a bullish trend day. But are we anchored by the first piece of information?įor instance, a trading session started off with a powerful bullish thrust.
Every price tick that comes in represents fresh information. The market keeps offering us new information. This cognitive bias refers to giving too much weight to the anchor when we make our decisions.Īs traders using technical analysis, who or what offers us the most information? The anchor here is the first piece of information offered.
Here, you will find ten cognitive biases that every technical trader can relate to. It only shows that our brains are not easy to fathom at all. You will also see that many of them are related or are just slight variations of one another.
If you research on the topic of cognitive bias, you will find dozens of biases. The good news is that once you are aware of your cognitive biases, you can cut their effects and stand a better chance at becoming a successful trader. The bad news is that you will never entirely overcome your cognitive biases, as long as you stay human. Being biased is not fatal, but it is an obstacle to your goal of trading successfully. As humans, we are affected by cognitive biases.
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