Understanding and Decreasing Confirmation Bias in Your Trading:
Trading psychology is an interest thing. Being able to understand and control your emotions while trading can be the difference between profit and loss. In fact, many argue that emotion should be taken out of your trading completely. Unfortunately, us humans aren’t robots, so feelings of excitement and despair are normal. But if we bring a rollercoaster of feelings to the stock market, it can lead to impulsive, ill-advised decisions. So in order to counteract such behavior, most successful traders rely heavily on trade plans, and are highly diligent in sticking to them. Those that don’t are often asking for trouble.
Discipline is the name of the game. And this is where Confirmation Bias can mentally trick you into becoming an irresponsible trader. Confirmation bias is the tendency to search for evidence that only supports your preexisting beliefs or hypothesis. For amateur traders, this is a common phenomenon. Heck, even veteran traders have a hard time avoiding/recognizing it from time to time. It usually starts with good intentions (at least I hope so) – proper due diligence and creation of a plan before entry. But once the trade is entered, all the trader looks for is evidence to support their current position. If they enter a long position, all they listen to is evidence that makes a bullish case. And if they enter a short position, all they listen to is evidence that makes a bearish case. Psychologically, we want as much confirmation as possible that the trade we took is correct, even if it’s not. It can blind you from the reality that you might be wrong. Ultimately, it can lead to overconfidence, improperly handled risk, and massive losses if uncontrolled.
Related Page: Free Resources For Stock Trading Beginners
Hi there
I cant help but feel like fear is something that we all have and is beyond our control, every time I make a trade and its moving against me I get so desperate and make decisions that I always regret and never learn from it.
So I believe this will be of help to me and many other people who trade stocks.
Hi Dave – it’s definitely hard to not let emotions get the best of you while trading, but I think avoiding those emotions all goes back to having a plan beforehand. When you have a trade plan with set risk and profit targets before you even enter the trade, it becomes much more mechanical. When you do that, you can avoid making impulsive decisions because your plan is laid out beforehand with a clear mind. Then once you’re in, all you have to worry about is controlling your risk (sticking to your stop loss) and/or capturing profits. Discipline is an underrated aspect of trading success. “Stock Picking” can only get you so far, and without proper risk management, consistent success is unachievable. Take care!