In trading, there is, among the subliminal cognitive biases, a term called anchoring. Indifferent from any cognitive biases, anchoring is considerably harmful.
Accordingly, the problem with it is that most traders do not, most of the time, recognize it. Even if, however, traders recognize it, they still disregard its negative impact and proceed with it.
Ridiculous as it might seem, traders tend to keep doing it due to lack of awareness of its danger. To understand how it jeopardizes traders’ mind, it is wise to, first things first, understand about what anchoring really means.
Also Read: The Danger of Loss Aversion in Trading
The Definition of Anchoring
To anchor, as a verb, means to secure firmly in position. That said, what does anchoring mean or have to do with trading?
In trading itself, to anchor, or anchoring, refers to traders’ tendency to rely heavily on the very first information they acquire. In addition, if they obtain further information regarding the same topic, their bias will affect them to robustly believe in the first information and negate the importance of the following.
For instance, A trader reads an information that Facebook has been successfully acquire WhatsApp, the skyrocketing business at that time. Afterwards, the trader reads several other news about declining Facebook users in numerous countries. In the case of anchoring, that trader will most likely still buy Facebook’s stocks in a significant amount despite the negative information following the good one.
How It Jeopardizes Trading
To briefly take a moment to look at the case, it might seem not essential. You might argue that this is quite natural since that acquisition truly means a good thing.
However, to merely believe in the positive thing of such phenomenon indicates ignorance. Try to look at it from a various perspective, particularly its impact to the current trading and in the long run.
Disregarding the continuous updates of information might result in a failure in trading. This is so for the established prejudice prevents the mind from weighing the ongoing condition of the markets.
Meanwhile, in the long run, it will gradually affect the mindsets to easily trust immediate information. What potentially happens next is that traders might tend to fail in analyzing market’s condition in an objective manner. Weak analysis is a serious crime in trading, at least for the traders themselves.
How to Outsmart the Bias
To outsmart the bias might equal to outsmarting your own mind and ego. In so doing, you need to constantly doubt your own mind prior to drawing a conclusion.
In a simplistic manner, anchoring leads you to stop at a temporary conclusion, which is not final. To avoid it, try to question yourself whether you have considered all the information, including the updates, adequately.
Strategically, there is practical way to assess your decision. Besides knowing when and how to implement stop loss, implementing trading news event or news release strategy is a good act.
Also Read: How Confirmation Bias Affects Your Trading
