Derek’s eyes got wide as he looked pensively at the charts displayed in his trading platform. He had entered a counter-trend trade on the ES and it was not working out as hoped (his first mistake: hoping is not for trading). He had his trading plan well in tow and the analysis that it was based on did not actually come from him but from an opinion piece in Bloomberg that said that markets were going to go up, even though the price action told a different story. After he heard that “bit” of information from Bloomberg, he impulsively entered the trade as he was moved by an internal bias that was based upon something external to him and that eventually had turned against him and ended in a loss. He felt like he had been cheated, he had believed that they were right. After all, this was the news and even though he chose to “listen” to the opinion piece without doing his own homework he still emotionally thought that he should have won and “it was their fault.” Actually, if he were honest with himself, this type of trade went against the philosophy of his rules which pointed out that counter-trend trading was not a high probability endeavor; and therefore he should have lost, but he was having none of that type of thinking. So, here he was, feeling betrayed, sick to his stomach and stupid because he had let an outside opinion unduly influence his behavior. The internal bias that he responded to has a name, it’s called a Confirmation Bias (the tendency to search for or interpret information in a way that confirms one’s preconceptions). He went on a preconceived notion that the news was correct simply because it was the news…he believed. Once he began to look at the charts his preconceived belief; i.e., his bias, distorted his perception of the information on the chart. In other words, he began to look for confirmation of the preconceived belief as based upon what he heard.
Humans have many biases that are for the most part out of awareness; but biases are not inherently negative. There are many biases that can serve you, for instance having a bias that looking at multiple time frames is supportive to having a… Continue Reading
