While experts argue that emotional management is among top deciding factors in trading, there is one that is closely relevant to it. It is the cognitive bias, a erroneous way of thinking potentially due to inaccurate emotional management. Among the biases, confirmation bias is a notorious one.
The reason that makes confirmation bias notorious is that it can happen to any traders with any level of experience. No matter how much experience you have in trading, this bias can still linger and distract you.
The above overview unveils how distracting this bias is. Considering its disturbance, it will be wise to discuss what is, how disturbing is, and how to avoid it.
Also Read: The Danger of Loss Aversion in Trading
What Confirmation Bias is
Confirmation bias is, as its name, a cognitive bias in which people tend to look for information confirming their hypothesis while disregarding everything else. In trading, this bias occurs when traders trade right after they acquire information that solely support what they have in mind and, at the same time, stop looking for information beyond that very context.
To illustrate it, take a trader who buy Facebook stocks just because he reads news about Facebook’s acquisition over Instagram. While this might sound positively encouraging, the trader might invalidate the fact that, at the same minute, Facebook’s users in numerous countries are significantly decreasing.
How the Bias Disturbs Trading
To what extent this bias disturbs trading, perhaps between 1 to 10, it can be said that initially it is 1 but in the long run it can be 10. Additionally, confirmation bias gradually damages trading in the long run, not in the beginning.
Put simply, in the beginning, the bias will cause a minor loss (unless you place a huge bet) and, mostly, traders will learn. However, if traders do not learn that they possess this bias, it can lead to a damaging mindset, which prevents traders from looking into reality as it is.
In the long run, traders might lose perspectives on the present of the market. This is due to they only believe in a fragment of reality or, rather, believe that the past is still notably relevant to this day.
How to Escape the Bias
To disassociate yourself from the bias, it is important to remember this one key. The key is, actually, simply by becoming objective. However, a new question pops, how to become objective and to what extent?
To answer the question, it is worth noting that objectivity, in brief, equals to looking at a phenomenon from various angles. The most practical way to be objective is to stay cautious over the market.
To be cautious means you have to be connected. To be connected means you have to be resourceful. Meanwhile, to be resourceful means you have to be relevant. And, to be relevant is to know what is going on. In conclusion, the key to objectivity can come from knowing what is going on, leading to reading news.
Also Read: Monte Carlo Fallacy in Trading
